By Colin Cieszynski, CFA, CMT, CFTe, Chief Market Strategist, CMC Markets, and Michael Hewson MSTA, CFTe, Chief Market Analyst CMC Markets Ahead of the tightly fought UK General Election on 7th May, Colin Cieszynski and Michael Hewson look at how a hung parliament result could affect the markets. Within the report Colin and Michael discuss: • The erosion of the traditional two party system towards another coalition government and how this will affect the market • The market impacts of historic, closely contested elections around the globe • Stock Market Performance following selected elections with contested results The race to win the May 7th UK General Election looks like it could go right to the wire with both the Conservative and Labour party neck and neck in the polls, convincing just 35% of the electorate each. UKIP stand in third with around 12-15% of the vote and the Liberal Democrats hold fourth position with just 7-9% of voters claiming they’ll vote Nick Clegg in for a second term. When you add the Scottish National Party, Plaid Cymru and the Green party into the mix, there are a number of possible variations that could form the next UK government, in the event of a hung parliament on the 8th May. This erosion of the two traditional parties dominance is likely to result in no party winning a clear majority, creating the second Hung Parliament in a row and only the second since 1974. More importantly, with seats potentially divided among these parties, it could be more difficult to create a working coalition, particularly if Labour is the largest party. If neither the Labour nor Conservative party are able to form a majority government, the ideal scenario for markets would be more of the same in the form of another Conservative led coalition government, with the help of the Liberal Democrats or even UKIP if the electoral maths works out. The other small parties of the Greens, SNP and Plaid Cymru are unlikely to pair up with the Conservatives, meaning that a deal with Labour would be the more likely option for them. Given some of the economically questionable measures in the smaller parties’ manifestos the biggest anxiety for markets would be the potential abandonment of fiscal responsibility by a Labour Party keen to get its hands on the levers of power, and who may be held to promises in exchange for that support. Stock markets hate uncertainty, and the potential for an unstable government following a close race could impact the FTSE and the pound in the days and weeks following a close race until a workable solution is found, if indeed there is one. A scenario where one of Labour or the Conservatives wins the popular vote and one wins the most seats could add to the potential mess and uncertainty. To get an idea of what a Hung Parliament could mean for the FTSE, and the pound, we have taken a look at several previous close elections from around the world which ended up creating more questions than they answered. Close or Contested Elections in the Past Minority and coalition governments in and of themselves are not particularly unusual, particularly in countries with proportional representation (as opposed to the “first past the post” system used in the UK and many other countries). The elections we looked at were ones that ended in particularly unusual or contested results that caused political crises that impacted confidence. These elections included: UK February 1974 Hung Parliament with Labour winning, but short of a majority. There were not enough third party seats to put together a majority coalition so an unstable government ended with another election being held in October of that year where Labour won a wafer thin majority, of three, which by 1977 had disappeared. Subsequent deals with the SNP and Plaid Cymru in 1978 enabled the government to limp on until 1979, but this deal broke down when the SNP withdrew their support consigning Labour to opposition for the following 18 years. UK May 2010 Results had the Conservatives come out on top to unseat Labour after 13 years but short of a majority. They entered into a coalition government with the Liberal Democrats that has held up to the start of the current election campaign. Canada October 2008 Federal election saw the Conservatives gain seats but come in just short of a majority. The second, third and fourth place parties who lost seats overall tried to band together and form an alternate coalition. A constitutional crisis was averted by the proroguing of Parliament during which time the alternate coalition collapsed. This all played out through the peak of the Great Financial Crisis which didn’t help matters. The Conservatives then won a majority government in the 2011 election. US November 2000 This presidential election was too close to call initially. Recounts were called for in several states with the main focus on vote-rich Florida. Ultimately, the dispute over who won was ended by a Supreme Court decision about a month later which ruled in favour of President George W. Bush. Greece May 2012 Election was won by New Democracy but they were unable to cobble together a majority coalition which was needed to pass bailout related measures. A repeat election was held in June of 2012 where New Democracy gained enough seats to pull together a coalition that held until they were replaced by a Syriza led coalition following the January 2015 election. Australia May 1974 This double dissolution election saw Labour win a slim house majority and the Liberal coalition win a small Senate majority. Infighting between the two groups led to double sittings of Parliament and significant strife. By late 1975 the situation had become untenable with the Senate refusing to pass supply bills, causing a constitutional crisis. This forced the Governor-General to dismiss the government all ending in a December 1975 election where the Liberal/National coalition won a clear majority. Stock Market Performance following selected elections with contested results For each of the elections in this century daily returns for the main local stock market index around the election date were analysed while for the two from the 1970s daily data was unavailable so monthly numbers around the election were used to approximate instead. Regardless, the results speak for themselves. Elections from five different countries that ended in a muddle were followed by immediate selloffs that only deepened as it became clear that there was no easy or quick resolution to the problems. In all six cases, the local market was down a month later, and in half of them, the local market was down more than 10%. This suggests that should the UK election end in an indecisive result and wrangling over a coalition government drags, the FTSE and sterling could become increasingly vulnerable through May.

ElectionsFTSEFTSESPTSXDowASXASE All Ordinaries 
 UKUKCanadaUSGreeceAustralia 
 FebMayOctNovMayMay 
 197420102008200020121974Average
        
Day Before (1.28%)(5.57%)1.47%0.37% (1.25%)
Day of (1.52%)9.82%(0.23%)0.00% 2.02%
Day After (2.62%)(6.35%)(0.41%)(6.67%) (4.01%)
Week After 3.28%(1.61%)(2.48%)(11.29%) (3.02%)
Month After(20.76%)(2.57%)(9.04%)(3.06%)(30.79%)(14.45%)(13.44%)

Source: CMC Markets Colin and Michael would like to thank to Michael McCarthy, Chief Market Strategist with CMC Markets Australia for help with Australian history.