THERE are many ways the UK General Election could affect the financial markets. But since most FTSE 100 companies have an international exposure, most agree that the effect will primarily be felt by small cap businesses.
Unless we get a Tory coalition with Ukip, that is. This could lead to an EU referendum and a Brexit scenario. If Britain does leave the EU, Germany’s leading Ifo economic research institute says that 3 per cent may be shaved off UK GDP by 2030. In a worst case scenario, that could reach 14 per cent. Given concerns about such a scenario, this should have a sizeable impact on most shares after the election.
In this situation, we expect a weaker sterling-dollar. However, we also expect a weaker sterling-dollar in the case of a Hung Parliament or a Labour minority government. The reason for this is the uncertain direction of UK politics, which should trigger a slowdown in domestic investment and spending, thereby delaying a Bank of England rate increase. We also anticipate a rate increase by the Fed before any UK rate hike.
If sterling weakness materialises, what would it mean for individual shares? Anglo American and Aviva, which are the most sensitive shares to sterling weakness, could themselves fall.
For more on our take on the UK General Election and its impact on sterling-dollar, euro-sterling and the FTSE 100 – feel free to join our webinar this week – bit.ly/UK2015WEB
Alejandro Zambrano is a currency strategy analyst at DailyFX.com.