Q. Dear Josh, with the general election announced, what will the market focus on?
A. British investors will keep an eye on the progress of both Labour and the Conservatives as we head closer to election day. The issue of a hung parliament is long-standing and we have already seen volatile movements in the pound. A hung parliament could significantly derail the plans to curb the deficit.
This has made the outlook very uncertain for sterling – ratings agencies have said that they could revise their stances on the UK’s debt rating should no clear fiscal plan emerge after the election. Sterling could remain sensitive to any new polling data and fiscal pledges within the manifestos of the leading parties.
While sterling is likely to be most affected by the election, there are other sectors that could see some volatility too. It is now well known that there are likely to be significant budget cuts and there has been speculation concerning potential rises in capital gains tax, national insurance and Vat. All of these factors could have a large impact on businesses going forward. For example, Vat and further national insurance hikes would put further pressure on consumers’ disposable income which may affect high street sales – this is why the majority of retailers have said the outlook for this year remains cloudy.
Q. Dear Josh, why is the Greece debt issue still affecting the markets?
A. Despite there being a package in place to help Greece, no line has yet been drawn under the issue. The markets hate uncertainty and this is exactly what the Greek debt situation has created so far. Last week, Greek yields rose to twice those of Britain, making refinancing even more complicated. The market will finally read the small print of the bail-out scheme this morning; it will be interesting to see what it thinks of them.
Uncertainty can spread like wildfire in the markets and the big fear is that Greece’s troubles could soon spread to the other debt-laden countries such as Portugal.
Revised figures last week showed that Eurozone GDP stalled in the last quarter, with both Portugal and Italy seeing contractions. This has not helped. The Greek tragedy is by no means over just yet.