With less than ten days to the general election in United Kingdom (UK) on May 7th 2015, the incumbent Conservative Party is running neck-to- neck with the opposition Labour Party in the polls. The rise of multiple smaller fringe parties has made the elections less predictable. The major risk of the tight polls is UK’s membership in EU. We believe economic realism would prevail but expect some currency volatility for both the pound and euro as we move closer to the elections.
There are three outcomes:
- Conservative (or -led) win
- ￼Right-wing policies focusing on ￼capitalism (lower tax) and ￼economic freedom (less ￼regulation, more privatisation)
- ￼Potential partners: Liberal ￼Democrats (current coalition ￼partner), UKIP (focus on getting ￼UK out of European Union)
- Labour Party (or –led) win
- Left-wing populist policies ￼emphasising equality, using ￼taxation to redistribute wealth (tax ￼the rich), more regulation
- ￼Potential partners: Scottish ￼National Party (independence for ￼Scotland)
- Hung parliament – everyone has a say
In reports by The Telegraph UK’s “Goldman Sachs bets on Conservative victory in most uncertain election in the century” on January 6th 2015 and Bloomberg’s “Goldman Says U.K. Tory Election Win More Friendly” report on April 22th, 2015, the investment bank believes that UK voters would re- elect the incumbent Conservatives into office due to their economic policy credibility. Even the International Monetary Fund Managing Director Christine Lagarde has cast a confidence vote for the incumbent leadership – past government policies “has actually worked” (BBC, April 17th 2015) with the right balance of spending cuts and revenue raising.
The most worrisome difference between the two major parties is the EU “In/Out” vote (“Brexit”) if the Conservatives win. UK’s membership in the EU gives it direct access to the world’s largest single market (eg. Hong Kong-China relationship). However, giving up some of its decision-making rights, such as immigration, to EU leaders, is very distasteful to some UK voters. The tightness of the polls is an indication that there is no clear indication from the UK voters on Brexit.
Looking beyond its shores, if UK leaves the EU, this will lead to more scepticism on EU and Eurozone membership, adding fuel to the potential breakup of the Eurozone (remember: Grexit and the debt default contagion fears). EU is the economic and political union of 27 member countries located in Europe, uses a standardized system of laws) while Eurozone is a monetary union of 19 members in EU that uses the Euro as their currency.
In our view, the most likely outcome is a “hung parliament”, with the Conservative Party eking out a small lead over Labour Party and forming a coalition with their current partner, Liberal Democrats again and even the UKIP. Everyone’s interests would be represented. After demonstrating the success of his past economic policies, Prime Minister and current Conservative leader David Cameron would balance between the advantages of being economically integrated with their next door neighbour – the EU and management of political noise and choose wisely. Economic common sense would prevail. One less uncertainty does not mean that we rush into financial markets. We maintain our overall prudent stance and continue to reduce our risk exposure.