Pound slides below €1.34 and stock market in the red as voters head to the polls
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Loading... - CRISTIAN CASTILLO
- 07 May 2020
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Financial markets and the sterling could be in for a bumpy ride in the aftermath of the General Election as an unstable coalition or the possibility of a referendum to leave the EU could spook investors.
The pound is more likely than financial markets to take a hit if a multi-party coalition or a minority Government is formed or if the possibility of a polling re-run rears its head. But the London stock market opened in the red on polling day with a fall for the FTSE 100 index of 51.7 points to 6,882.
Hargreaves Lansdown analyst Steve Clayton said: ‘A Tory victory, or Tory-led coalition, is probably the market's first choice, certainly for financial services sectors and utilities. But investors did not do too badly under Labour, personal taxation aside.’
The pound continued its slide against the euro today, falling below €1.34 for the first time since the start of February - having bought as much as €1.40 early last week.
In the month up to the last election in 2010 the pound fell from $1.5335 to a low of $1.47 on election day itself, falling further below $1.45 the following day when the reality of a hung parliament hit home.
In a boost to the Conservatives on the final day of the election campaign, two reports yesterday showed the economy is on course to grow by 0.8 per cent in the second quarter of 2015. That is a marked improvement on the 0.3 per cent increase in gross domestic product seen in the first three months of the year and was welcomed by senior Tories.
Research group Markit said its index of activity in the UK’s services sector rose from 58.9 in March to 59.5.
It was the best score for eight months and the 28th month in a row that the index has been above the crucial 50 mark that separates growth from decline.
Chris Williamson, chief economist at Markit, said it put Britain on course for growth of 0.8 per cent in the second quarter.
‘It looks like the economy has rebounded from the weakness seen at the start of the year,’ he added.
A separate report from the National Institute of Economic and Social Research also said Britain is on course to grow by 0.8 per cent in the second quarter and again in the third quarter.
Kathleen Brooks at Forex.com said that like in the past, a hung parliament could cause a 'knee jerk reaction' lower in the pound.
But added: ‘A sell-off in the pound could be sharper this time around, as GBP/USD has rallied more than 5 per cent in the weeks leading up to this election.’
‘It could take even longer this time round for a recovery in the pound to take hold due to some idiosyncrasies with this election including: an EU referendum if the Tories get into power, and a potential Labour coalition with the Scottish National Party,’ Brooks added.
Meanwhile, analysts expect individual sectors to be impacted differently depending on the outcome of the elections.
Shares in banks are likely to take a hit regardless of which party comes to power, according to Michael Hewson at CMC Capital Markets.
‘All parties are expected to be picking the banks' pockets in the next parliament, so don't expect any surprises here with the bank levy, likely to increase whoever is in power, along with a possible banker's bonus tax,’ he said.
Another sector at risk of government interference post this week’s election is the transport sector with talk of fare caps, fare freezes and greater regulation, Hewson said.
A review of the rail franchise system under Labour could leave privately-owned train operators such as Stagecoach and First Group with more uncertainty, according to Hewson.
Meanwhile, shares in energy firms could take a hit if Labour wins after Ed Miliband pledged to freeze prices and hand more power to regulator Ofgem.
Clayton said that shares in British Gas owner Centrica and SSE could ‘enjoy a bounce if Mr Miliband does not make it through the door of No 10’.
And housebuilders could be ‘both winners and losers from the election’ according to Clayton.
A surge in house-building under Labour could mean growth in the lower margin social housing end of the sector while a mansion tax could bite at the top end.
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Financial markets: Shares in banks are likely to take a hit regardless of the party to take power, analysts said
Meanwhile, the Hargreaves Lansdown analysis cited potential Labour moves for an end to zero-hours contracts, an increase in the minimum wage and a push for the ‘living wage’ as likely to be unwelcome for high street retailers.
Higher staff costs would seem likely to hit high street firms competing against online retailers with fewer staff to support - though, in the longer run, ‘if people have more money in their pockets, retailers could still be winners from the changes’.
In the lucrative outsourcing sector, the last election showed that ‘a change of colour causes inertia in the civil service’, Mr Clayton said.
This could prove another blow to Serco in its latest turnaround efforts though leaving rival Capita better set with minimal re-bids and contract expiries due over the next five years.
James Bateman, head of portfolio management at Fidelity Solutions, said key uncertainties for investors could be over the shape of the new government, its ability to implement policy, and the risks posed by the policies.
He said: ‘A hung parliament after the General Election would likely spook UK equity markets, and the potential for a prolonged political stalemate could see them fall in a relatively quick period, perhaps by as much as 5-15 per cent.
He said there was also the risk of an 'illegitimate' minority government, where the largest party in terms of seats isn't in power. This could cause markets to constantly price in the possibility of an early dissolution, meaning significant uncertainty, Bateman said.
He added: ‘While it's unlikely that any of the major parties would be able to enact their manifestos in full, some of their individual policies would cause significant uncertainty for markets if implemented.'
