Markets aren’t worried about the election yet – but they will be

You know the election campaigning is in full swing when the open letters start hitting the newspapers.

Today we've got a bunch of business leaders writing in The Daily Telegraph that the Conservative-led coalition has been good for the economy.

By tomorrow, no doubt Labour will have dug up a motley crew of their own to sign some sort of counter-letter. Expect a lot more of this nonsense before the big day arrives.

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As yet, markets aren't really fazedby the mudslinging.

But the danger is that it won't be long before they start to wake up to the potential nightmare scenarios.

Markets could get a nasty shock in the run-up to the election

The big risk, it says, is that the SNP wins a landslide in Scotland, leaving a Labour-led government dependent on the nationalist party for support.

"Imagine a similar situation in Spain if the central government were dependent on Basque or Catalan separatists, or a Canada beholden to the Parti Quebecois This could turn the UK into a sort of pre-crisis Spain, with mounting piles of regional debt to fund local spending."

That's bad news. Britain is still in a pretty vulnerable financial position after all. We need money from overseas investors to pay for our current account and budget deficits. As BlackRock puts it, we're "particularly reliant on the kindness of strangers for financing."

The risk is that the pound could take a hit as we get closer to the election. Not only that, concerns that the government might slow down the pace of cutting the deficit (our annual overspend), could "likely lead to a temporary sell-off in gilts and steepen the yield curve." (In other words, interest rates would rise.)

To be fair, the asset manager isn't just worried about a Labour/SNP coalition. It's got a few things to say about the risks of a Conservative victory too. This would "pave the way for an unsettling referendum in 2017 on the UK's European Union membership".

The other big risk is that we'll have no particularly clear outcome and there will be plenty of wrangling for who takes the top job, with the prospect of an early repeat election just around the corner.

What can you do about this?

But just because no one is panicking yet doesn't mean that they won't. The Scottish referendum is a very good case in point. The apathy was palpable until a fluke poll in The Sunday Times suggested that the country was actually going to vote for independence. That had a very real and rapid impact catapulting the story into the headlines and also putting a dent in the value of the pound.

As Royal Bank of Scotland put it, it can take a while for markets to react to political threats. The FT points out that "sterling fell to a ten-month low in a few days last September after a poll suggested that the campaign for Scottish independence was on course for victory".

Now, of course, as an investor, beyond sensible diversification not having all of your money in sterling assets there's not a lot you can do until we find out who's in charge. Hopefully that'll be clear come 8 May, though there's no guarantee.

But we're working on a special project right now to make sure that MoneyWeek magazine subscribers will be the first to find out exactly what the election outcome means for your investment strategy. If you're not already a subscriber, sign up now so that you don't miss out (you'll also get your first four issues free of charge).