A Long Time In Politics

26/05/2017 at 5:37 pm

This morning’s most widely-read headline on Bloomberg was “Pound Falls on Tighter Polls as Traders Wake Up to Election Risk”. As the article puts it:

Sterling fell against all of its 16 major peers on Friday after a poll showed the Conservative Party’s lead over the main opposition Labour Party has narrowed to five percentage points with two weeks to go until the June 8 election. That comes after weeks of surveys showing a bigger Tory lead had made the vote all but a foregone conclusion for the market . . .

If the swing to Labour were uniform across the country, May would lose seats in the House of Commons, with the Tory majority falling to two from 17, the Times said.

As Harold Wilson is supposed to have said, a week truly is a long time in politics.

When Theresa May announced the election at the end of last month her lead in the polls was so towering that the contest looked cruelly unfair to her opponents. One April survey put her party on 50% against only 25% for Labour. Predictions were being made of electoral wipeout for the latter and a landslide victory for Mrs May on a similar scale to that achieved by Tony Blair in 1997.

And then the Conservative manifesto was launched.

This contained a novel commitment to strip those of the nation’s elderly unfortunate enough to suffer dementia of their family homes after death. At the same time the existing commitment to preserve the real value of the state pension was dropped. The coup de grace was delivered a few days later, when May – slogan, “strong and stable” – U-turned abruptly on the Dementia Tax proposal by suggesting that the raid on the estates of the mentally ill would be subject to an unspecified cap. Now branded “weak and wobbly”, and having stamped all over some of her party’s core vote, Mrs May’s victory is no longer in the bag. Indeed, with a 25-point lead reduced to a slender 5-point advantage in less than a month it is arguable whether she could have done a better job of throwing the contest on purpose.

To investors today, then, falls what had seemed like a redundant exercise: we need to assess the possible consequences of a Conservative defeat.

Those traders mentioned by Bloomberg have identified sterling weakness as a product of this, either at the hands of a Labour-led coalition or a hung parliament. But the fall so far has actually been rather muted: yes, the pound is a cent and a bit weaker against the dollar but it is still well above its January low. It has fallen by less than a cent against the euro. So far, it has stabilized above its morning bottom against both currencies.

Staying with sterling, uncertainty can cut both ways. Our 8 June vote was billed as the Brexit Election. The Labour manifesto commits to remaining in the single market and customs union (i.e. no economic, nor much political change from the status quo) and ditching the “Great Repeal” of EU law. It also rejects a “no deal” / WTO rules exit and commits to a parliamentary vote on the final offer from Brussels. And the Lib Dems are calling for a second referendum. So a Tory defeat could well see the end of Brexit altogether, or at least its indefinite postponement. Would this not be taken as positive for the pound?

A Labour triumph, now no longer unthinkable, would have consequences far beyond the currency of course. The party commits itself to £250bn worth of spending on railways, energy projects and data networks. It also commits to £250bn of lending to “small businesses, co-operatives and innovative projects” via a National Investment Bank. That is comfortably more than the level of current annual lending to SMEs by the entire British banking system, and not far off the total group balance sheet value of customer lending at RBS (£352bn in 2016). Might there not be some consequences for bank profitability here?

Similar points could be made about plans for price caps on energy bills, or railway nationalization. And then there is the broader point about the national debt, and interest costs. The latter are already troubling and for 2016-17 were set to bust through the £50bn mark, only a little less than the entire education budget – and that’s with gilt yields of around 1%. Adding to the nation’s debt burden by more than a quarter would push it past 110% of GDP and see interest costs rise still further. Again, this might well have consequences for the pound, the gilt market, stocks . . .

Despite the headlines, then, it is safe to say that a Conservative defeat is not being much priced in at all. It is true that it would still be a surprise, and that there are almost two weeks of the campaign left to run. But it is now a real possibility.

This election is turning out to be much more exciting, and potentially more consequential, than anyone could have expected.

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