London Daily

Focus on the big picture.
Saturday, Feb 22, 2025

The looming UK election is one big gamble for investors

The looming UK election is one big gamble for investors

Brits are being asked to vote in an election that could end years of paralysis caused by Brexit. For investors, there are new risks-whatever the result.

Traders face weeks of tumult ahead of December 12, when the United Kingdom holds its third general election in four years. The vote could end over three years of Brexit uncertainty, or plunge the country's political system deeper into chaos.

Each potential outcome comes with risks for investors. One scenario is another divided parliament and no path forward on Brexit. Or Prime Minister Boris Johnson could wind up emboldened, resurfacing fears of a damaging break with the European Union. The vote could also install a left-wing government led by Labour chief Jeremy Corbyn, which investors worry would mean major structural changes to the UK economy.

"Take nothing for granted in the forthcoming election," Brian Hilliard, chief UK economist at Société Générale, warned clients in a note Tuesday. "Just ask Theresa May," he added, referring to the former prime minister who gambled and lost her majority in a risky snap election in 2017.


Advantage Johnson

Johnson's Conservatives have a solid advantage over Corbyn's Labour Party in early opinion polls. But the British public is sharply divided over Brexit, causing many voters and even some politicians to switch their allegiance to other parties. The pound is effectively trading flat as traders wait for campaigning to kick into high gear.

Investors aren't as shaken by the prospect of a Johnson victory as they were a few weeks ago. That's because the prime minister secured a Brexit deal with the European Union before he called the election, and will ostensibly campaign on getting his agreement through UK parliament. That the European Union agreed to again extend the Brexit deadline to January 31 provides added comfort.

"It looks less likely that Boris Johnson has to campaign on a hard Brexit," said Kallum Pickering, senior economist at Berenberg Bank. He expects Johnson to narrowly win a majority and subsequently get approval for his deal.

Pickering views this as the most favorable outcome for investors, since a Conservative majority would clear the way for market-boosting deregulation and fiscal stimulus in the form of infrastructure spending and possible tax cuts.

But a Johnson win - which would likely be followed by a swift Brexit in January - also poses risks. For one, the exit deal he secured with the European Union would ultimately erect significant trade barriers for many companies operating in the United Kingdom, hurting businesses that would otherwise be propped up by his policies.

Plus, Britain may not be able to work out the huge number of complex trade issues that would need to be resolved by the end of 2020, when a transition period included in Johnson's deal would expire. That raises the possibility that Britain could wind up trading with its biggest export market on highly unfavorable terms.


On the other hand...

For investors, who already face a UK economy on the brink of recession, the alternatives aren't demonstrably better.
The Labour Party, should it wind up in power, may choose to launch a second referendum that could reverse Brexit entirely. That would send the pound and other UK assets soaring. (The pound is currently trading below $1.29. Before the first referendum in 2016, it was close to $1.50.)

But Corbyn's Labour Party terrifies some in the business community. The party's manifesto from 2017, its most recent, says it would "overhaul" regulation of the financial system and nationalize certain "key" utilities. Corbyn has pledged to force large companies to give at least a third of the seats on their boards to workers, and to strengthen unions' bargaining rights.

"The economy and financial markets may either have to cope with a combination of a hardish Brexit and business friendly policies under the Conservatives or a softish Brexit and business unfriendly policies under Labour," Paul Dales, chief UK economist at Capital Economics, wrote Tuesday in a research note. "That limits the upsides for equities and the pound whatever the election result."

Dales thinks that if Labour wins a majority, Brexit would be delayed beyond January 31, after which there's a 50% chance that the party strikes of a deal that would maintain closer ties to the European Union, and a 50% chance of a second referendum.
The calculus changes if Labour doesn't score a majority, and is forced to cooperate with either the Liberal Democrats or the Scottish National Party. That could mitigate the scope of some of Corbyn's reforms.

There's also the threat of another parliament in which no party claims a majority. That would further muddle the picture for Brexit, and mean additional years of uncertainty.

"We cannot exclude the possibility that a general election in December returns another hung parliament in which the Conservative Party leads with a handful of seats short of a working majority," Goldman Sachs economist Adrian Paul wrote in a note to clients Wednesday. The result? More of the dynamics that led to the "current impasse."

Newsletter

Related Articles

0:00
0:00
Close
UK Prison Officer Sentenced for Inappropriate Conduct with Inmate
Good News: Senate Confirms Kash Patel as FBI Director
Officials from the U.S. and Hungary Engage in Talks on Economic Collaboration and Sanctions Strategy
James Bond Franchise Transitions to Amazon MGM Studios
Technology Giants Ramp Up Lobbying Initiatives Against Strict EU Regulations
Alibaba Exceeds Quarterly Projections Fueled by Growth in Cloud and AI
Tequila Sector Faces Surplus Crisis as Agave Prices Dive Sharply
Residents of Flintshire Mobile Home Park Grapple with Maintenance Issues and Uncertain Future
Ronan Keating Criticizes Irish Justice System Following Fatal Crash Involving His Brother
Gordon Ramsay's Lucky Cat Restaurant Faces Unprecedented Theft
Israeli Family Mourns Loss of Peace Advocate Oded Lifschitz as Body Returned from Gaza
Former UK Defense Chief Calls for Enhanced European Support for Ukraine
Pope Francis Admitted to Hospital in Rome Amid Rising Succession Speculation
Senate Republican Leader Mitch McConnell, at the age of 83, Declares His Retirement.
Whistleblower Reveals Whitehall’s Focus on Kabul Animal Airlift Amid Crisis
Politicians Who Deliberately Lie Could Face Removal from Office in Wales
Scottish Labour Faces Challenges Ahead of 2026 Holyrood Elections
Leftwing Activists Less Likely to Work with Political Rivals, Study Finds
Boris Johnson to Host 'An Evening with Boris Johnson' at Edinburgh's Usher Hall
Planned Change in British Citizenship Rules Faces First Legal Challenge
Northumberland Postal Worker Sentenced for Sexual Assaults During Deliveries
British Journalist Missing in Brazil for 11 Days
Tesco Fixes Website Glitch That Disrupted Online Grocery Orders
Amnesty International Critiques UK's Predictive Policing Practices
Burglar Jailed After Falling into Home-Made Trap in Blyth
Sellafield Nuclear Site Exits Special Measures for Physical Security Amid Ongoing Cybersecurity Concerns
Avian Influenza Impact on Seals in Norfolk: Four Deaths Confirmed
First Arrest Under Scotland's Abortion Clinic Buffer Zone Law Amidst International Controversy
Meghan Markle Rebrands Lifestyle Venture as 'As Ever' Ahead of Netflix Series Launch
Inter-Island Ferry Services Between Guernsey and Jersey Set to Expand
Significant Proportion of Cancer Patients in England and Wales Not Receiving Recommended Treatments
Final Consultation Launched for Vyrnwy Frankton Power Line Project
Drug Misuse Deaths in Scotland Rise by 12% in 2023
Failed £100 Million Cocaine Smuggling Operation in the Scottish Highlands
Central Cee Equals MOBO Awards Record; Bashy and Ayra Starr Among Top Honorees
EastEnders: Four Decades of Challenging Social Norms
Jonathan Bailey Channels 'Succession' in Bold Richard II Performance
Northern Ireland's First Astronaut Engages in Rigorous Spacewalk Training
Former Postman Sentenced for Series of Sexual Offences in Northumberland
Record Surge in Anti-Muslim Hate Crimes Across the UK in 2024
Omagh Bombing Inquiry Concludes Commemorative Hearings with Survivor Testimonies
UK Government Introduces 'Ronan's Law' to Combat Online Knife Sales to Minors
Metal Detectorists Unearth 15th-Century Coin Hoard in Scottish Borders
Woman Charged in 1978 Death of Five-Year-Old Girl in South London
Expanding Sinkhole in Godstone, Surrey, Forces Evacuations and Road Closures
Bangor University Announces Plans to Cut 200 Jobs Amid £15 Million Savings Target
British Journalist Charlotte Peet Reported Missing in Brazil
UK Inflation Rises to 3% in January Amid Higher Food Prices and School Fees
Starmer Defends Zelensky Amidst Trump's 'Dictator' Allegation
Zelensky Calls on World Leaders to Back Peace Efforts in Light of Strains with Trump
×