In just under four weeks, the UK will face its General Election and quite something it might prove to be. I am no fan of either of the leaders of the two main parties – David “call me Dave” Cameron and Ed “Miliboy” Miliband – and had no interest in listening to them calling each other idiots on the TV debate that took place recently.
But at the end of the day one of the two will end up as Prime Minister of the United Kingdom. And, as Marcus Ashworth, head of fixed income at BESI, reminded me last week, the contest is on a knife-edge. “This election is coming down to two words: Economy vs Equality,” he wrote. “And I defy anyone who says this is all dull – it’s a right humdinger.”
The election is certainly too close to call. Although there are all manner of minority parties in the running, the first past the post (relative majority) system weighs against them and the outcome of the election will be determined by how these minority parties – such as Ukip – split the vote on a constituency by constituency basis. Ukip is thought to be able to garner up to 15% of the popular vote but will probably only end up with one seat.
So why, I ask myself, do markets seem to be so sanguine about the prospect of a hung parliament where Cameron’s Tories end up as the largest party but where Labour with the possible support of the Scottish National Party under the left-wing leadership of Nicola Sturgeon (who will not sit in Westminster) might jointly command a majority? Why aren’t markets scared of the price that Labour might have to pay for SNP support?
And why don’t markets appear to be that worried that, should Cameron hang on to power one way or the other, there will be a referendum on the UK’s membership of the EU?
Why do markets seem to be so sanguine about the prospect of a hung parliament?
IN ACT II of Richard II, Shakespeare put the following words in the mouth of John of Gaunt when speaking of home: “This precious stone set in the silver sea, Which serves it in the office of a wall, Or as a moat defensive to a house, Against the envy of less happier lands, This blessed plot, this earth, this realm, this England,” Fine words in the 16th century but in the 21st with globalised trade, instant communications and strawberries at Christmas it is nothing but a cold, wet rock that is geographically closer to Europe but spiritually more aligned to America, both of which are struggling to deal with an emerging China.
It is an average place with a principal stock market index that tells us more about the global commodity market than it does about the state of British industry and a government bond curve that owes more to the vision and skill of its debt management office than it does to its finance ministry or its central bank (which is, anyhow, run by a Canadian). In the end, the UK is like a diamond ring: no matter how beautiful and how valuable, the ring can only go where the hand that wears it is going.
Whatever the election rhetoric, the real agenda will be set by developments beyond the silver sea and although great statements of intent will be made, markets evidently assume that in the end Westminster can only follow the principal agenda set by Washington, Brussels (or should that be Berlin?) and Beijing. It rarely takes long for those occupying 10 Downing Street (and 11 for that matter) to discover that at it is the applause from overseas that keeps the show on the road.
The markets will give either government the benefit of the doubt. They will surely begin to dip into the election but rally out of them. They always do. If a price is to be paid, it will be paid on the actions the actual government takes and not on the grand speeches and expressions of intent propounded at the hustings.
VOCIFEROUS ARGUMENTS BETWEEN the two leading parties over healthcare and defence, over education and taxation are in my view nothing but red herrings. No matter who is in power, they will have to consider who is going to fund whatever it is that they want to do and that will largely be the economy.
At what point they tax economic activity is what distinguishes them, not whether they do. Thus, what remains is the matter of borrowing. Both are promising to balance the budget but Miliband talks of “borrowing for investment” as not being part of that balancing act. Thus, a Labour victory should steepen the curve, soften sterling and leave equities indifferent or even happy. Look what the weak euro has done for European equities!
If the City were honest, it would quite like that move. Offshore investors might like it too. Thus, from where I’m looking, one goes into the election short equities, buys the living daylights out of them irrespective of who wins, but goes short duration Gilts on a Labour victory and long if the Conservatives triumph.
As far as a hung parliament is concerned, I’d love to know where and when the hanging will take place, whether anybody can watch and, if so, how much the tickets will cost.