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Here’s what will happen to the pound after the election

Markets clearly expect a comfortable Tory victory in the election. But you never know. John Stepek looks at different possible outcomes, and what they would mean for the pound.

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It's easy to dismiss democracy as a sham. But it's the best of a bad lot. Make sure you vote.

2017 Getty Images

It's the big day.

Plenty of other stuff is happening in the US, Donald Trump's long road to impeachment might begin today as sacked FBI boss James Comey testifies, and the European Central Bank's long road to reversing QE might begin as ECB boss Mario Draghi testifies but for us British citizens, there's really only one story we care about right now.

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At the start of the 2017 general election campaign, the outcome was a sure thing. Now it's apparently anyone's guess.

But forewarned is forearmed, as they say. So what should you be preparing for?

The three main scenarios for markets tomorrow morning

But one thing I can say is that, by the looks of the pound, markets clearly don't expect anything other than a comfortable Conservative victory not a landslide, but not a hesitant win either.

Now, if you are an incorrigible speculator, then I'd say that the best way to play the election is to sit up all night and trade sterling. Even if you're right, chances are you'll lose money (so hard to control the emotions, especially at 3am). And you'll be too knackered to go to work tomorrow. But if that's your hobby and you aren't a gambling addict, then fair play to you.

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But even if you plan to be sensible and get a good night's sleep before carrying on with your life as normal tomorrow, it's not a bad idea to have a sense of the different scenarios you might see.

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Apart from anything else, if you wake up and the pound has slumped, it's useful to be able to put it into context right away, rather than having a spasm of panic.

So let's outline the main scenarios. There really are only three worth considering.ING has put out a useful note on the outcomes, and their analysis looks pretty convincing.

The state of play is that the Conservatives need at least 326 seats to get a majority. They've currently got 331. Clearly, they're hoping to get more than that, or there was no point in calling the election.

So the first scenario: a Conservative landslide. ING pegs that as a majority of 50 seats or more. That'd end up being good for the pound. You have a stable government and a leader with the confidence of her own party behind her (which is important, because it means she gets to shape Brexit, and my own gut feeling is that she'd go for a much less confrontational tone once properly in charge).

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In that sort of scenario, ING reckons the pound would spike towards $1.32 and in the longer run, if a "softer" Brexit looked likely, $1.35 would be the longer-term target.

The second scenario is a narrow Conservative victory (a less-than 50 seat majority). ING reckons the pound would be pretty much flat then.

That's probably a little simplistic. There are nuances within this the 40 to 50 level is one thing, but if the Tories end up on the same number of seats or even fewer than they are now, then May's credibility will have been shot. She'll need to find some way to reassert herself, or she'll be a lame duck. So I reckon the pound would struggle with a really thin majority.

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The third scenario is the real market worrier, reckons ING a hung parliament, with the Conservatives on 290 to 325 seats. In a way, this is more of a worry (for markets) than an outright Labour majority.

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Markets don't like uncertainty. An outright Labour win would at least be possible to price in quickly. And in the first instance, if it pointed to a "soft" Brexit (whatever that actually is), then the markets might even go easy on the pound.

In the longer run, they might start to worry when they realised that Jeremy Corbyn really wasn't joking about the Venezuelan economic model, but markets are quite slow on the uptake that way they're oddly trusting creatures.

If, instead, we end up with a situation in which there is no clear winner, and instead you're looking at another election, or some sort of messy coalition, then the pound could fall hard ING reckons that in that scenario, it could fall as far as $1.24. Given that the pound is currently not far off $1.30, that's a pretty spectacular slide not Brexit-spectacular, but pretty hefty.

Do you need to do anything about this? No, you don't. If you have a sufficiently diversified portfolio for your needs a good chunk of money in non-sterling assets (some European and Japanese stocks, a bit of gold, some emerging market exposure) then fluctuations in sterling shouldn't have an overly troubling impact on your portfolio.

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As for the actual outcome well, we can't plan for that until we see what happens. But there will be breathing space to adjust your personal financial picture for the outcome before the next budget rolls around.

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So the key thing is: don't panic. You don't even need to look at your portfolio tomorrow. And it might be best not to.

In defence of representative democracy

It's easy to be cynical. It's easy to sit and sneer. It's easy to dismiss democracy as a sham, and voting as an opiate for the masses, and to view the whole thing as one twisted game that you shouldn't participate in, because it'll only encourage them.

Of course, one reason why it's easy to do all of these things, is because we live in a democracy, where we can all say broadly what we want to, and where there are broadly effective checks on power.

Our system isn't perfect. No system is. But so far, universal suffrage beats the divine right of kings, revolution, one-party rule, voting for the property-owning classes alone, and every single other methodology we've found for managing the transition of power from one clique to another.

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The primary advantage is not that it delivers wonderful, inspirational leadership every single time (or even very often). It's that it involves a lot less blood being spilled when you fire the latest useless lump to get the role, or when your once-wonderful, inspirational leader inevitably loses their marbles after ten years in the job and has to be pushed out.

So unless you actually have a better idea, and one that you are actively pushing an agenda for (and I'm always interested to hear those sorts of ideas, so do please email me if so), then I think you should vote.

Spoil the ballot if you want to or better, vote for the daftest fringe candidate you can find (you might as well register your discontent in a visible manner, and if your daft fringe candidate happens to win, it doesn't matter, because you don't think it makes a difference anyway).

But do vote.

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