Election 2015: Good news! That was the last election we’ll have this year

published 8 May 2015

150508-cameron — The Conservatives are back in Number 10

If you didn't already know who'd won the election, a quick glance at the markets this morning would tell you straight off.

The pound's up. The FTSE 100 is up. Gilt yields are down.

The very last votes are still trickling in, but it's all over bar the shouting.

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Compared to what the polls were predicting, it might as well be a landslide.

The Conservatives look set for victory

Here's what we know. The Conservatives are on course for a majority. That's the first Conservative election victory since 1992.

Elsewhere, Scotland is almost entirely SNP (I never thought I'd see the day when I'd be able to say that the Tories have as many MPs in Scotland as Labour admittedly, one apiece.)

The Lib Dems have been virtually wiped out. Only Nick Clegg remains standing of the cabinet ministers. Labour has done far worse than expected. And Ukip has won a lot of support, if not seats.

The political upshot is that the Lib Dems and Labour are going to be looking for new leaders.

So what's it all mean for investors? In the short term, the market is pleased. Sterling's up, and a whole load of specific sectors utilities, banks, etc will probably gain as the spectre of various market interventions vanishes.

Meanwhile, pension reforms should remain intact (although Steve Webb, the Lib Dem pensions minister, is a real loss on that front if the Tories have any sense they'll find a way to keep him in the loop somehow).

Britain's public finances are still messy. That means the next Budget and spending review (in the autumn) might not be pretty. Keep an eye out for stealth taxes.

The thing is, these are all problems that Britain would have faced under a Labour-led government. And arguably, those problems would have been worse under a government that isn't trusted to do a good job of running the public finances.

So what's more interesting is the issues that are unique to this particular outcome.

New Scottish powers need to be matched with new Scottish responsibilities

First there's Scotland. It might seem confusing, but a vote for the SNP does not equate to a vote for independence. This is more a no to Westminster/London' vote. I think the Holyrood elections in 2016 might be more nuanced.

However, Nicola Sturgeon couldn't really have hoped for a better outcome. If Labour had won, they'd have to strike up a frenemy' relationship pretend to be pals, but plot behind each other's backs.

With the hated Tories in charge, full-throated calls for independence will be the order of the day, and all of Scotland's ills even the ones that are firmly under the control of Holyrood, which is most of them can be blamed on Westminster.

There is one problem though. The Conservatives look set to have won a majority, so technically they have no need to make any concessions to the SNP. They don't need to grant devo-max, or another referendum, or anything else.

And it might just be me but democratically speaking, it's kind of problematic to push Scotland down the road towards independence when people living in Scotland voted really quite decisively against it just a few months ago.

But one way or another, this is going to be messy. An outright win is one thing but trying to get laws past a bloc of 56 MPs who are inclined to permanently vote against everything you propose still won't be fun. Expect to hear a lot of noise about English votes for English laws, and the West Lothian question.

As an investor, the key thing is this: any new spending powers for Scotland need to be matched by more fiscal responsibility. In other words, if Scotland gets to control the purse strings, then it needs to be in charge of filling the purse up in the first place.

Of all the major parties (and it is a major party now, in terms of seats), the SNP was the least coherent (which is saying something) on its spending plans before the election. It somehow managed to be anti-austerity while funding large spending increases and cutting the deficit at the same time.

Those things aren't economically possible, and if that's an experiment Scotland wants to embark upon, it needs to do it with its own money. It can't be underwritten by the rest of the UK's taxpayers.

Forget Grexit Brexit is going to be the new favourite chattering class tale

Secondly, there's Brexit'. Will Britain leave the European Union? David Cameron has promised to have a referendum in 2017. Will he stick to that? I think he will, although I'd also be reluctant to bet on a politician's promise. Let's assume he will.

The biggest threat is that investors see Britain as a riskier place to be without EU membership. Arguably that could be bad for the pound and might make some companies reconsider where to locate new factories and the like. Maybe we won't be seen as quite as much of a safe haven'.

That said, leaving the EU is not like leaving the euro. There's no redenomination risk. Any sterling assets you own will still be sterling assets if Britain leaves.

So again, this will be a very, very noisy issue indeed. And the closer we get, the more the wobbles will grow. But in terms of economic impact, the bigger immediate threat might well be the internal divisions it causes in the government. Europe has always been a toxic issue for the Tories, and when you have a slim majority, the last thing you want is a group of eurosceptics crossing the floor to join Ukip, for example.

Anyway, I can see this is an issue we're going to be spending a lot of time on over the next year or two.

But overall, the good news is that we don't have months of uncertainty. We don't have the possibility of another election looming. We have hope for some continuity. And we have a broadly business-friendly government that at least pretends to aspire to fiscal responsibility.

I'd say this is about the best result investors could hope for a pleasant surprise, given the run up.

Oh and just a reminder before I go - we'll be putting out our election special podcast for MoneyWeek readers later today watch out for it.

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.