UK Election 9/6/17
What happens to UK shares in the event of:
ONE// Increased Tory majority
TWO// Hung parliament
THREE// Labour victory/ coalition with e.g. SNP??

 

Eoin Treacy's view

Thanks you for these questions which represent some interesting potential outcomes from the upcoming election. The Pound is perhaps the best arbiter for what investors believe the potential outcome is likely to be. 

It has been inert against the US Dollar for the last six weeks as it holds above the 200-day MA. However the Dollar has been weak over the same period so the Pound’s performance versus the Euro is probably a better indication of sentiment. The Pound has fallen since the announcement of the election and is now back testing its progression of higher reaction lows. 

The currency collapsed following the Brexit vote and while it has steadied year-to-date, the interventionist tack taken by Theresa May is unlikely to be particularly good news for the economy, at least compared to the libertarian options available to the UK where it could truly plot an independent free market capitalist trajectory. There is little doubt the Pound will react to the election result and a swing to Labour/SNP, while unlikely, would likely result in a powerful rally because Brexit would suddenly become less likely. 

An increased Tory majority would result in May solidifying her position and pushing ahead with Brexit. That would dampen potential for a further Pound rally which should be positive for stocks in nominal terms. It would also ensure the Bank of England would leave QE in the system a while longer and potentially stoke inflation which would also likely be positive for shares.  

A hung parliament would call Brexit into question, would mean the government has less room for negotiating and the Conservatives may have to court a coalition partner. It’s not a great outcome but it’s probably manageable. 

A Labour/SNP victory would be bad news for shares and we could expect a sharp pullback, but it would probably be viewed as positive for the Pound because the incoming government would likely take the election result as a referendum result. 

The AIM100 Index has been among the best performing of the UK’s indices this year but pulled back today from the 5000 level suggesting some profit taking in the region of the big round number and Thursday’s election.  It is quite overextended relative to the trend mean so some consolidation of recent gains is looking more likely than not. 

From an international investor’s perspective the iShares MSCI UK ETF trended lower between mid- 2014 and early this year; when it rallied to break the medium-term progression of lower rally highs. While somewhat overextended in the short-term a sustained move below the trend mean would be required to question medium-term scope for additional upside.