We have a new Conservative prime minister who has stated that there will be no general election while the party unites around him, but how long this will last is another matter.
Rishi Sunak’s Cabinet is made up of people from across different party factions, making a harmonious culture unlikely. Meanwhile, there will undoubtedly be pressure from the general public for Sunak to call an election after the recent debacles that have led to the resignation of the two former prime ministers Boris Johnson and Liz Truss.
If there was an election, there is a strong chance that Labour leader Keir Starmer would be in power, with the Labour party enjoying a huge percentage of the vote, according to a poll from YouGov.
According to the chart above, Labour would receive more than half of the public vote, while the Conservatives would get around 23%. Labour has been ahead in the polls for all of 2022, but this is among the widest disparity there has been between the two parties.
When former Labour leader Jeremy Corbyn was the potential replacement prime minister, markets were nervy that his left-wing agenda would derail the economy.
This time around, with a more centrist leader, it may be different. Ruairi Dennehy, co-head of investment research at Dennehy Weller & Co, said that there may be a “profound market move in the one or two days after a Labour win”, but that markets would settle as “vulnerabilities are spread far wider than the ruling party in the UK”.
“This list will most likely look different by the time a Labour government comes in, but vulnerabilities include: global debt mountain, 10 years of quantitative easing coming to an end, inflation fears, Ukraine conflict, Covid rearing its head, hugely overvalued US stock market and more,” he said.
If Starmer is elected, it will likely be at a time when there is an abundance of economic damage. Russ Mould, investment director at AJ Bell, said that there are two potential outcomes, depending on the mood music of markets at the time.
“If the FTSE 100 has roofed it to 9,000 in expectation of a Tory win and then Labour wins, the market could fall. But if it has plunged to 3,000 and already discounted a Labour win, it might not do much,” he said.
“But my crystal ball just can’t cope,” he added.
Dennehy noted that hopes of a turnaround under Labour following the volatility of the Conservatives should allow undervalued UK stocks to shine, with cheap, out-of-favour areas of the market coming back to the fore.
“These should be captured by a value investing strategy, such as found in Schroder Recovery, and amongst the better smaller company funds, such as Fidelity UK Smaller Companies and Artemis UK Smaller Companies, both of whom experienced top-of-the-sector performance since the value rotation in November 2020, as well as holding up better than all of their sector peers year-to-date,” he said.
Dennehy and Mould both said however that investors should view the outcome of a general election as extremely unlikely, at least in the short term.
This is a view echoed by Bestinvest managing director Jason Hollands, who said that while Labour is “unsurprisingly calling for a general election”, it is unlikely with the Tories lagging significantly in the polls.
“It is for the government to decide when to call a general election, which it can do at any point within five years of the previous one. With the Tories languishing so far behind Labour in the polls, calling an election now would be at extinction level event,” he said.
“There really is no reason why the government would choose to call an election now other than if it lost a vote of no confidence in the House of Commons. As the saying goes, turkeys don’t vote for Christmas. The government will therefore want to try and stabilise their precarious position under the new prime minister and try and close the polling gap before contemplating seeking fresh electoral mandate.”
Hollands added that investors are better off looking at the current economic conditions, in which whoever is in charge will be acting within severe financial constraints and so radical policies, especially those that entail higher borrowing, will likely get a thumbs down from the markets – as we saw recently with the Truss administration’s disastrous mini-Budget.