“From our vantage point, it is not clear that the market is pricing in the full extent of the uncertainty or a long enough window. It seems likely that volatility, particularly in sterling, will be more pronounced and last for a longer period of time after the election date.”
The potential for an ill-fitting coalition could also create a rise in volatility for sterling, as well as for other UK asset classes.
John Bilton, global head of multi-asset strategy at JPMorgan Asset Management, says: “One of the attractions of UK assets to international investors has traditionally been their perceived safe haven status – in large part reinforced by robust property rights and a predictable parliamentary system.
“Fundamentally, while either a two-party or multiparty system is perfectly legitimate and functional, the structural transition from one to another is not without risks and tensions.”
But it isn’t all doom and gloom. Stephen Jones, chief investment officer at Kames Capital, says the equity market has “priced in all the uncertainty”.
Mr Jones says the equity market is supported by strong economic data “that doesn’t appear to be coming under too much threat either from the election campaign or the policies of the main parties”. He adds the common ground between Labour and Conservative manifestos has helped reassure market sentiment.
On bonds, he says the 150 basis point spread between 10-year gilts and German bunds – which are well supported by the European Central Bank’s quantitative easing programme – suggests any UK political uncertainty has also been factored in.
Steven Bell, chief economist at F&C Investments, says the strength in putting in place a tough fiscal policy sooner rather than later will be more critical than the “colour” of the election outcome.
“When you gain office you must be very tough in the first two years on your economic policy so that you can relax in the second half and get re-elected,” he says.
“If not, you end up having a mid-term crisis and you lose office.”
He adds almost every government since Margaret Thatcher – bar the incumbent – has taken this approach for their successive wins.
Mr Bell adds that potential spending cuts by whichever government is elected could “push out even further the prospect of an interest rate rise”, which may mean gilt yields remain attractive on a relative basis and continue to attract investment and thus support the UK.
