UK ELECTION 2019: The Four Key Scenarios

The four likeliest UK election scenarios – as things stand right now
Overview

It is around a week before Britain’s first December general election in around 100 years and polls continue to indicate that Boris Johnson’s Conservatives could secure between 40% and 45% of the vote. As such, the line of least resistance points to a Tory election win. Of course, over the last few years, polls have become less and less reliable at forecasting election outcomes. The following scenarios represent our best guesses of the likeliest election outcomes as things stood on Tuesday 3^rd December, together with the probable market impact. By definition the scenarios and outcomes are subject to change depending on any further twists and turns during the campaign that impact the polls. And market outcomes may be entirely different depending on actual election results.

Scenario 1: Strong Conservative Majority

If the Tories under Boris Johnson secure significantly more than 326 votes, that will constitute a strong Parliamentary majority.

Outcome 1

Johnson moves swiftly to get his deal through Parliament, even as early as 31^st December. Given that every Conservative candidate has signed an agreement to vote for the deal, with a majority, Johnson can rush it through Parliament, allowing Brexit to happen by 31^st January deadline.

Market Reaction 1

The pound and other UK-linked assets would probably rally further under this scenario. However, the rally could stall when Britain moves on to the next stage of Brexit: negotiations on a trade deal with the EU. This will bring fresh difficulties with Brussels which favours far closer alignment in a deal than rebel Tories would probably accept.

Scenario 2: Weak Conservative Majority

Of course, the size of a Tory majority is almost as important as the majority itself. Theresa May’s and Boris Johnson’s governments have shown how snarled up the legislative process can be with a low majority. Both were dependent on the backing of 10 MPs from the Irish DUP party, for their majorities.  Johnson’s amended withdrawal legislation won conditional Parliamentary approval in October, but MPs failed to agree with an accelerated timetable for making it law.

Outcome 2

If the polls turn out to be wrong (again) and Johnson only secures a small majority—say 326-330 seats—the Conservatives will be no better off than at the end of the last parliament. That would reduce the chances of a speedy passage of the Brexit bill. The 31^st January deadline might be missed, necessitating another extension.

Market Reaction 2

At the time of writing, the pound was trading around $1.30, the highest since late October. It will almost certainly trade below that psychological level in the event of further Brexit delay that brings extended uncertainty and removes prospects of an end to Britain’s economic slowdown. UK-tied assets, including shares in companies that make most of their sales in Britain would be pressured too.

Scenario 3: Labour forms a government after a Hung Parliament – but not with Jeremy Corbyn as PM

If the Tories get fewer than 300 seats (compared to 298 before the election), even if Labour also loses some seats, it may still be able to form a government with the support of smaller parties. An SNP- and possibly Lib-Dem backed Labour party could in theory create a government. There is even a chance that The Green Party’s one MP, or more, if re-elected could also aid Labour, as could Wales’ Plaid Cymru, which currently has 4 MPs.

Outcome 3

But the Liberal Democrats have made clear that the price of their support is that Labour could no longer be led by Jeremy Corbyn. That would set up an internal battle that could last right up to 31^st January, at least, before a new, as yet unidentified, leader is appointed. Another extension of Britain’s EU membership would be much more likely, assuming the coalition doesn’t simply tear itself apart. The latter occurrence would raise the possibility of another election.

Market Reaction 3

From a markets point of view, this might be the worst of all possible outcomes due to uncertainty. Even if a coalition forms,  uncertainty will persist given its inherent instability. The pound could trade as low as $1.25 and perhaps lower. UK stock markets might be negatively impacted more broadly than under other scenarios. The FTSE 100—which contains more companies that don’t depend on Britain for most revenues—could be dented as much as more domestically focused indices like the FTSE 250.

Scenario 4: Labour forms a government with Jeremy Corbyn as PM

If the Conservatives lose seats but Labour grows its current 243 seats to somewhat above 280, it could form a government without the Lib Dems, by relying on just the SNP’s 35 MPs instead. SNP support is conditional on another independence referendum, though the timeline has yet to be determined. Either way, that possible plebiscite would hang over a Labour-led coalition as well as over the Brexit process.

Outcome 4

Brexit itself may never really happen. Yet it might not be entirely clear it’s not going to happen for years. Labour’s policy is to hold another Brexit referendum after securing a closely aligned Brexit deal with Brussels. It is unclear how long all this would take. The only plus point from a market perspective is that a hard Brexit would be ruled out for good.

Market Reaction 4

On the one hand, sterling would remain supported given that an economically damaging form of Brexit will be even further off the cards. On the other, markets have traditionally been averse to Labour governments under less contentious circumstances than Brexit. A measure of that typical aversion alone will hinder the pound, suggesting a top no higher than $1.35. What’s more, although Labour’s ambitious fiscal and privatisation agenda might be watered down in coalition with the SNP, aspects of it could survive, weighing on public finances and investor confidence. Throw in Brexit/not-Brexit uncertainty and the outlook for the pound and UK assets suggests a bearish bias for years to come.

Original from: www.forex.com