Should you cut and run before the vote?

The Brexit referendum was on the first day of Glastonbury. 175,000 people went. Another 1.75 million watched it at peak times. An average of one million watched it all the time. The big bands didn’t play until the 24th but I think we can still say that an awful lot of people were distracted on the 23rd. Bet you a bitcoin they were nearly all 18-30.

The Brexit majority was a mere 1.3 million people. The young voters who didn’t vote could have swung it.

Now to this year. 2.3 million new voters have registered since this election was called. 93% of students now say they are registered to vote (and given that Jeremy Corbyn has promised them free tuition from September if he gets in, guess who the majority of them will be voting for?). This Thursday is not the first day of Glastonbury (it is the beginning of the Hampton Court Festival but that’s not quite the same thing).

You get my point. UK elections can turn on small numbers – and even irrelevant sounding events. Sure, May will probably win. But you can’t ignore the risk of a hung parliament or the tail risk of a man referred to by one of his own MPs only a few weeks ago as “an unelectable incompetent extremist” actually winning.

This matters to markets – Jeremy Corbyn’s core policies (handouts for everyone but the well-off and companies, paid for by the well-off and companies, plus a little nationalisation on the side) are not exactly pro-business. Nor do they bode well for the UK’s already huge public debt problems. So a Corbyn win (which really isn’t priced in – the FTSE 100 hit a new high last Friday) should mean serious sterling weakness.

That would usually mean that the prices of the UK stocks that earn abroad would rise. But with the threat of a mega rise in corporation tax out there plus no end of price caps and corporate interference, that may not happen this time.

The same goes for gilt prices. You would normally expect them to rise when bad stuff happens (safe-haven status). But when that bad stuff means a whopping rise in the national debt, where is the safe haven? Maybe not in gilts.

A hung parliament – or even a smallish majority for Theresa May – would also lead to a fall in the pound for the simple reason that the failure to cement the firm mandate May claimed she was calling the election for would weaken her Brexit negotiating position even if she got to stay on as PM (how can anyone in the EU know she can deliver on her promises if she is hounded by Labour and the SNP at every turn). And every hint that no deal is more likely than a good deal hits the pound. The risk is not as high as it was before the Brexit vote, but only because the pound has fallen so far already (it’s still pretty good value).

A majority of anything below about 25 seats might also mean that May feels she must stand down – something that would put us right back where we started (with a leader with no personal mandate).

This is all tricky to predict – to the extent that it is pointless trying. What we can do, however, is to note that while sterling has wobbled slightly, the market appears to still be assuming that May will get a good majority – not as good as she wanted, but good enough to get on with taking back control etc.

I would not suggest hedging the (still quite small) risk inherent in this by selling everything in the UK to buy equities abroad (as one nervy investor told me he was thinking of doing this morning). There is cost in that (to say nothing of an awful lot of risk – you’d feel a fool if there actually was a Tory landslide). But that said, if you were planning to put new money in the UK market now might be a good time to remember that cash has wonderful optionality – or to finally get around to investing some money far, far from Britain (see my editor’s letter from last week for some suggestions).