What the General Election means to investors

•  The Tories win

•  Labour wins

•  Nobody wins meaning a hung parliament ensues

• The Tories win - The Tories plan to cut the deficit quicker than the other parties, revoke the N.I. rise that labour have brought in and cut corporation tax to 25% by 2011, also they plan to cut the deficit via spending cuts rather than tax. The markets and business leaders do seem to favour the Tories over Labour currently, thus if they win it is likely that sterling will strengthen.

•  Labour wins – Labour have been a lot more coy about what their exact plans are, and seem to have fallen out of favour with the markets via being so coy, but what we do know is that they plan to cut the deficit at a later point than the Tories, and they plan to cut it via tax rises rather than spending cuts. As businesses and the markets seem to favour the Tories currently, if Labour win, it is likely that Sterling will stay under pressure until the markets gain more confidence in Labour, and Labour finally announce what their true plans are. Though it has to be said the Unions seem to back Labour over the Tories and there has been rumours a Tory win could spark militant strikes by the Unions.

•  A hung Parliament – This would be the worst case scenario for the UK and could cause a run on the pound, as it would create a lot of uncertainty about what is going to happen. This is because no one would know what was going to happen, for example will the leading party try to form a collation party? Will there be another election? Could the Queen use ancient laws to reject the PM’s request to dissolve parliament and thus leave Gordon Brown in power? Any of the latter could happen as could many more scenarios hence there would be a lot of uncertainty about, which markets do not like.  Also while all of the latter happens, the UK could be leaderless meaning that no one would be working on cutting the deficit, which would definitely not be good for the Pound.

•  The Tories win – The Tories winning would likely help to stabilise the Pound, and could even cause it to strengthen, with a strengthening Pound likely to reverse some of the gains gained earlier in the year from the fall of the Pound. Though of course there is no guarantee of this, as no one knows what the exact plans of the Tories are. Also it is possible that because the markets like the Tory proposals stated earlier that they could see a jump if the Pound stays flat. But there is a possible downside to the Tories winning, if the Pound does strengthen as many expect it to if the Tories win, it would likely mean that the UK import/export figures could suffer. Also because a weak Pound has been the main reason for the strength of the London property market, with 80% of buys coming from abroad and because the London property market has been propping the UK property market up, a rising Pound could cause the London property bubble to pop.

•  Labour wins – If Labour wins it is likely that the Pound will struggle meaning that the FTSE 100 could see some more gains, as a falling Pound normally has an upward affect on the FTSE 100. I would discuss more on how markets would react to a Labours win, but at current there is not enough detail, as said all we know currently is that they plan to cut the deficit at a later point to the Tories. 

• A hung parliament – A hung parliament as said would likely be a worst case scenario for the UK government, and could even cause a run on the Pound and even worse possible downgrades on UK sovereign debt. But as said this could cause the FTSE 100 to rise again, as a falling Pound is normally good for the FTSE 100.

Of course all of this is just speculation about what could happen in the short term. Long term, who knows what will happen, or which party has the best policies.  What this all shows is because most of the top UK listed companies trade in foreign currencies and make most of their profits in foreign markets , a poor UK economy is not necessarily bad for investors (click here to view Gray discuss in more detail the Pro's and Con's of a falling Pound).

In conclusion, everything in this article highlights a point that I made in my weekly market review, and that is short term the markets will likely follow the polls. Just to make a note, the polls could also provide great insight into which way the markets may go in terms of the election result. For example if the Tories are leading the polls and are heading for a win, and the Pound strenghtens on this news then it could point to the fact that if they win, the Pound will strengthen, but if they lose it could fall back. To finish, it is impossible to judge who will win the election, or how the markets will react to certain scenarios (all you can do is make educated guesses). However, the result of the election will very likely play a big part in the direction that the markets head in over the next year, hence it is very important that investors monitor all events surrounding the election.