UK Election 2015: An unexpected outcome

iStock_000016271702XSmallFinancial markets reacted positively to the news the Conservative Party had won a slim majority in 2015’s General Election. A clear majority, however slender, should allow the elected party to enact government policy, and prevent a period of ambiguity while the terms of a coalition are negotiated.

Investors had generally been expecting another hung parliament and therefore financial markets had not really factored in the possibility of an outright majority. As a result, share prices rose on relief that an element of uncertainty – which markets hate – had been removed. In particular, the news provided a boost for share prices in the banking, energy and housebuilding sectors, which had all been expected to come under pressure from a Labour government. Labour had promised to enforce further regulation on the banking sector and to impose new regulation on the energy and property markets.

Gains were especially pronounced among medium-sized companies – which tend to be more exposed to the domestic UK economy than the global multinationals in the FTSE 100 index – and the FTSE 250 index reached a new high following the election result. Meanwhile, sterling surged against the euro on the news of the Conservative victory and, having risen sharply in the run-up to polling day, the yield on the benchmark 10-year UK gilt subsided.

For now, at least, the election result has provided a certain amount of clarity amid hopes that current government policy will remain in place. This clarity is expected to deliver a short-term confidence boost for investors and is also likely to provide support for business investment in the longer term.

With the General Election now out of the way, investors’ attention is likely to revert to the timing and scale of an interest-rate rise while, looking further into the future, political uncertainties will be kept alive by doubt over the UK’s role within the European Union (EU).

Prime Minister David Cameron’s past promise of a referendum on the UK’s EU membership by 2017 is likely to trigger fresh speculation over the UK’s future within the EU, leading to anxiety over the potential implications for the UK economy and for the pound. Meanwhile, strong gains by the Scottish National Party could reignite the thorny issue of Scottish independence. Elsewhere, having pledged not to raise income tax until 2020, the government still has to meet its deficit reduction targets.

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