Yet another British vote rapidly approaches.
The electorate can be forgiven for feeling somewhat weary after weathering a large number of high stakes votes in short order. Still, it is important that they pay attention. While this election lacks the outright existential consequences of the Brexit and Scottish referendums of years past, it is no trifle. Voters are tasked with choosing between markedly different economic visions, and markets stand ready to cheer or boo depending on the outcome.
And the winner is...
Polls continue to argue that the incumbent Conservatives maintain a substantial lead in voting intentions relative to Labour, though the gap has narrowed markedly, from a plus 20 percentage point chasm in early April, to no more than 10 points today. Were this shrinking trend to continue on its recent trajectory, another nail-biter could await on election day.
Looking further down the form chart, the Liberal Democrats still appear to be tainted by their collaboration with the Conservatives in the prior administration, and have sunk to single digits in the polls. Meanwhile, Ukip has largely fallen from relevancy now that its reason for existence – yanking the UK from the European Union – has been achieved.
Betting markets are even more sanguine than the polls, assigning a roughly 90 per cent likelihood to a Conservative victory, versus under 10 per cent that Labour will capture the most seats. However, it is telling that more than half of the bets currently being cast take the Labour side of those odds. This suggests that the Conservative victory may not be quite as assured as the probabilities first suggest (though, alternatively, it could speak to a universal love of the long shot).
There is no denying a recent British inclination toward election surprises and close calls. Brexit was certainly a surprise. The previous national election handed an unfathomed majority to the Conservatives. The Scottish referendum ultimately went as per plan, but was certainly a close affair.
In other words, expect the unexpected.
In the most likely event of a Conservative victory, little would change. The party already enjoys a majority and has had a reasonably free hand at implementing legislation given its pre-existing majority.
The British election bottom line is that a Conservative majority remains likely, and markets should be slightly pleased by this outcome.
At the margin, Prime Minister Theresa May’s clout would slightly grow both within and outside the party since a win would remove the epithet of “unelected” from her title. Many also argue that Brexit could become a bit less “hard” since the election could buy a few more years of negotiating time and unify various Conservative factions. That said, we still budget for a fairly harsh separation of the UK from the EU in this scenario.
The market response to a Conservative majority would likely be modestly risk positive, meaning slightly higher equities, marginally higher yields and a stronger pound. Any such move should be no more than slight given that this outcome is already overwhelmingly priced into markets.
On the other hand, a win with fewer seats than the existing count might undermine this celebration.
A Labour victory is rather less likely. Leader Jeremy Corbyn is a stark departure from the Tony Blair school of centre-left British politicians. Corbyn tilts much further to the left and embodies a form of populism very different from that on display in the US.
Proposed policies include nationalising industries, raising corporate and top personal tax rates, increasing government spending, elevating the minimum wage and creating a national bank tasked with lending to small businesses.
None of this would play very well with British competitiveness or the stock market, though it could conceivably help inequality and social cohesion.
Labour of love
Practically speaking, a shock Labour victory would likely induce a notable retreat in equities and a moderate decline in the pound. Divining the logical direction of government yields is considerably more difficult given the contrary impulses that could emerge from a fear of higher debt (yield-positive) versus growth concerns (yield-negative).
While any such market reaction should be significant given the scale of the surprise, let us not exaggerate the consequences given that 1) any Labour government would likely be constrained to minority status; and 2) the Labour party offers the silver lining of a softer stance on Brexit.
The British election bottom line is that a Conservative majority remains likely, and markets should be slightly pleased by this outcome. The mishandling of Brexit seems surprisingly irrelevant to Conservative prospects.
The thing to watch over the coming days will be whether polling continues to draw the two parties ever closer together. If yes, other political scenarios suddenly become conceivable, arguably with negative market consequences. Of course, unlike a sovereignty referendum, these results can always be unwound at the next election.
Eric Lascelles is chief economist at RBC Global Asset Management.