The X factor

Today the date for the UK general election was announced. May the 6th it is. It is once again time for British citizens to place their X to choose the future direction of the country. From a UK bond investor’s perspective this could well be a significant catalyst in determining the future direction of UK economic policy too.

Although the latest polls are quite close, it seems likely we’ll get a new government. The question is what kind of government? And will the decision be made on the 6th May or will we be left with a hung parliament?  A hung parliament is currently perceived to be a disaster – how can you have a catalyst for change when you have no one in charge?

The uncertainty of the result would be compounded by whether parliament is hanging to the left or to the right, and if you can excuse the horrendous image, how well hung parliament is! The fate of parliament would then be decided by the Liberal Democrats. What are they likely to do? They are likely to pursue the policies they believe in and to work with the mandated larger party, which due to the bipolar nature of the UK system could be either party, the one with the most seats, or the one with the most votes.

The critical thing about the UK election from a bond (and currency) investor’s perspective is the resolving of uncertainty over the future of economic policy. This is where the Liberal Democrats can increase or remove uncertainty and thereby extend or remove the UK risk premium based around the election. I think the latter alternative is the obvious political choice.

The reason they need to do that can be expressed in a less highbrow way. The biggest annual vote in the UK is probably the X factor. Imagine the final of X factor with three candidates on stage, the simply red Gordon Brown, the blue aficionado David Cameron, and the Bruce Springsteen inspired Nick Clegg who is in charge of their fates and appears to therefore be the Boss. Well, the one thing that Clegg can not do (despite being Born to Run?) is ask the electorate to vote again, because as the weakest link he would be eliminated if the electorate was forced to choose between the other two parties in traditional two party British political fashion, resulting in the Liberal Democrats losing seats and influence.

Therefore a hung parliament is not likely to lead to further indecision, and delaying of policy implementation, but like a clear victory, even a hung parliament should provide a catalyst for change, and a collapse in risk premiums that could benefit both Sterling and the Gilt market.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

Job Title: Fund Manager

Specialist Subjects: Government and corporate bonds

Likes: Running, cycling

Heroes: Mohammed Ali, Winston Churchill

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