Drifting towards constitutional chaos

Typically markets give little consideration to political events until they are right on top of them, so it may now be appropriate to give some thought to the possible outcomes of the UK general election. Nationally the poll ratings for Conservative and Labour have been very steady for well over a year now, though ibn Scotland Labour have been losing significant numbers of voters to the SNP. A parliament of 650 MPs made up of approximately 280 Conservative, 270 Labour, 30 Lib Dem, 50 SNP and 20 other (15 Unionist and UKIP on the right, 5 Green and Plaid Cymru on the left) is close to that implied by the political betting markets and current polls, and would leave the UK political scene in a very uncertain state.

This would leave the traditional right-of-centre parties at 295, the Labour, nationalist and Green parties at 325 and the Lib Dems in the centre with 30. The implication would be that the only two-party coalition majority that could get close to a majority would be a Labour/SNP coalition; however the price of such a coalition would very likely be the break-up of the UK itself. Alex Salmond would be the SNP leader in Westminster and he has shown himself to be a very effective political operator in the coalition politics of Holyrood.

Sadly no other outcome looks good for markets either:

  • Traditionally the best outcome for markets would be a majority for a stable right-of-centre government. A Conservative majority, while looking extremely unlikely at the current juncture would however be one fraught with political and constitutional risk as the Conservative manifesto will commit to holding a referendum in the UK’s continued membership of the EU. The uncertainty that such a referendum would engender in the minds of business leaders would be very negative for investment in the UK, and a vote to withdraw is likely to be viewed very negatively by the UK financial markets.
  • A continuation of the present Conservative/Lib Dem coalition, is also not likely on the current poll ratings. It would however be likely to feed continued Scottish disgruntlement, where neither of the UK governing parties is likely to have much representation north of the border. Further demands for more powers for the Scottish parliament are also likely to be met with stronger rhetoric for English-only MPs deciding English matters, bringing the very concept of the Union under deeper strain.
  • A minority Conservative government would find it very difficult to get its economic and budget policies through parliament, where a combination of Labour, Lib-Dem and SNP votes would block most of their plans.
  • A Labour/Lib Dem coalition looks unlikely to have enough support within parliament by itself, it would be dependent upon support from the SNP to pass legislation and that support would come at a price. The same would be true for a minority Labour government.
  • A Labour majority would not be welcomed by financial markets as Ed Miliband is perceived as one of the most anti-business Labour leaders since Michael Foot.

Weak government and constitutional uncertainty look to be the only sure thing to come out of the forthcoming election. Weakness in the euro is the current flavour of the month in the currency markets, following the ECB’s decision to (finally) implement QE. By the time May is here, it may be they are seeking a new trend – weak sterling on the back of political uncertainty could well be that new trend.

2015 – a double election year?

2015 looks set to be a particularly political year, with the possibility of there being two general elections looking increasingly plausible. In the last six months, the strong performance of UKIP in the European elections and the SNP in the referendum vote, have seen UK politics move from the three party affair thrown up by the 2010 election (itself a radical departure from the two party politics naturally favoured by a first-past-the post system) to one where the fortunes of five different parties need to be considered to determine the final outcome of the 2015 election. One could add the Green party as a sixth, given their existing one seat and recent improvement in the polls.

In a constituency system with just one vote, a candidate merely needs more votes than any other candidate, and does not need the support anything close to half the electorate to win. In a 4-way competition, just 25.1% could theoretically be sufficient to win the seat. Thus the impact of new parties drawing votes from existing parties can make predicting the winner of any individual constituency incredibly difficult.

UKIP are currently showing at 17% in the opinion polls, with their support being drawn approximately ¾ from former Conservative voters and ¼ from former Labour voters. This could be enough to win a handful of seats, but the more important national impact could be the split in the Conservative vote allowing Labour to win some individual constituencies where they would not otherwise expect to have sufficient support.

The interest and passion displayed by the Scottish electorate in the independence referendum has continued since then and the SNP has in recent polls been drawing huge support from former Labour voters in Scotland, where Labour currently holds 41 seats, which are now under threat.

Support for the Liberal Democrats collapsed from the 26% achieved in 2010, from the moment they reversed stance on student fees in the initial Coalition Agreement. Their 7% showing currently in the opinion polls is very poor but their MPs tend to have built large local support bases in their constituencies and they are likely to win more seats than their national support would suggest.

The two major parties have not between them garnered the support of more than 2/3 of the electorate since the last election campaign (in 1945 they took 95% of the vote, but have been in decline since then). The current distribution of constituencies favours Labour, who hold many inner city constituencies where the size of the electorate has shrunk over the years, whereas Conservative constituencies are more concentrated in the suburbs where electorates have been rising.  Until recently, most analysts believed that Labour could win a parliamentary majority with just 35% of the national vote, whereas the Conservatives needed to win about 40%.  The recent rise of UKIP and the SNP probably means that these estimates need to be increased.

On current YouGov forecasts, not only will neither Conservatives nor Labour win a majority of seats, a coalition of either party with the Liberal Democrats will also not produce a parliamentary majority. The most likely outcome of the May 2015 election is thus a second election in October/November next year.

Opinion polls do fluctuate and there are still almost six months until the poll that matters, but the electoral arithmetic against a stable outcome looks difficult to overcome. For UK financial markets this may be troublesome in 2015.  This was always likely to be the case as a Conservative-led government would be committed to holding a referendum on EU membership in 2017, which would generate huge uncertainty in the minds of business with regard to investment in the UK, whilst a Labour-led government would be led by Ed Miliband, who would be seen as the most left-wing and anti-business Prime Minister that the UK has seen.

It is difficult to work out what a good election outcome would be for the financial markets.