Election 2015: it’s still neck and neck – no wonder the pound is wobbly

The uncertainty surrounding the outcome of the election is making markets very nervous. And this is just the beginning, says John Stepek. There's plenty more volatility to come.

John Stepek
By
published
in Features

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All this uncertainty could cause problems for an incoming government

What a weekend!

Giant stone tablets, Damascene conversions (Russell Brand's "don't vote unless there's an election!" moment), this election campaign contains more gimmicks than your average Happy Meal, but a lot less substance.

No wonder markets are finally starting to get twitchy.

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The pound's current twitchiness might just be the beginning

What thatmeans is that traders are feeling more worried about fluctuations in the value of the pound than at any point since the aftermath of the last election.

As the FT puts it: "currency traders believe another indecisive outcome will trigger twitchiness in the foreign-exchange markets, as horse-trading to form a new government leaves a temporary political vacuum".

For now, the three-month index is "considerably lower". In other words, traders reckon we'll get a burst of ups and downs, but then things will calm down as we get some sort of clarity on the next government.

However, that might be a rather optimistic take. As Richard Batley of Lombard Street Research notes: "Sterling volatility picked up sharply during the coalition negotiations that followed the 2010 election, and then subsided as they were quickly concluded".

But the danger is that we won't get a rapid conclusion. The concern this time around is that the election "is the harbinger of a new era of persistent political fragility. So less an explosion of risk than a debilitating background radiation of unpredictability".

You can easily see how this might happen. If one thing seems likely, it's that the winner of this election will need the support of at least one other party. Even if the existing coalition gets back in, this campaign leaves plenty of fault lines and exposed wounds not to mention the jockeying for position to replace David Cameron as leader.

There's the question of constitutional turmoil too. The Scottish National Party will be a significant presence. It may not have as much power as it hopes (it's rather backed into a corner by its political inability to do any sort of deal with the Tories), but while another referendum may not be on the cards, the independence question is sadly hardly "settled for a generation".

And you've got the EU referendum looming in 2017. The referendum itself is one thing there are plenty of good reasons to have one, democracy being one of them. But the internal upheaval and distraction it will cause in terms of campaigning and rifts between and within parties could be disruptive to say the least.

You can see a scenario where Britain goes from being a comparatively stable developed economy with an attractive tax regime and political consistency, to being a much more uncertain home for anyone's money.

"At its most extreme", notes Batley, "this could start to challenge global investors' choice of the UK as their main European-but-not-euro-area' safe haven".

This could cause problems for any incoming government particularly at a time when the global bond market looks wobbly.

Make sure you stay up to date

One party could still end up getting a clear endorsement from the electorate; or it might all be so close and the result so disputed that we end up with another election before the end of the year.

And in between all that, there's a rainbow of possibilities (though that makes it sound more attractive than it actually is), each with itsown effecton the investment environment.

We have no idea who'll win. But we do have an idea of what each outcome would mean for your money. And we'll be keeping MoneyWeek readersbang up to date on the results as soon as the ballots are counted. So if you've not already joined us maybe you've been thinking about it but haven't quite made the leap yet now's the time to do it. You can find out more here.

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John Stepek
John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.

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