The best Conservative election victory in 20 years brings a Tory majority for the next UK Parliament but casts doubt over our continued membership of the European Union. Less obviously it may also reopen the Scottish question, making the future of the Union less certain than it might at first appear. We consider the financial implications and what this could this mean for our investments?
Financial markets hate uncertainty. By all accounts the SNP landslide in Scotland could have been the catalyst for such uncertainty, had Labour achieved the result it needed to move forward as a minority ruling group in need of SNP support. With a clear, albeit slim Tory majority, one would expect that much of the uncertainty about the future of the British Union would have been removed, thus offering a more positive and reassuring environment for investors. The FTSE 100 and other UK indices reacted positively to the news and rose accordingly but this may be short lived.
During the run up to the election the SNP’s Nicola Sturgeon made great efforts to back the Labour Party into a corner over a possible coalition with them, rather than allowing the Conservatives to win an outright majority or form a coalition with UKIP and others. Mr Miliband rejected her pleas and in so doing handed the SNP the landslide in Scotland we witnessed last night. Now Mrs Sturgeon can claim that their 57 MPs will be a powerless group in an ‘English’ Parliament, dominated by a Conservative administration that a large majority of Scots oppose.
The perfect scenario for an Independent Scotland?
This is the perfect scenario for an SNP that is about to fight elections to the Scottish Parliament, giving them all the ammunition they need for a reopening of the independence debate and ultimately a second chance at a referendum. The SNP would be better placed to create far stronger arguments, back by experience and could have a better chance of achieving their aim, exactly what is not required for certainty and stability in the UK financial markets.
And then there’s Europe…
This is not the only Union that is threatened by the outcome of yesterday’s election. Although the broad political direction of the UK Government for the next five years is now far more certain than it would have been under a second coalition, the UK’s continued membership of the European Union is now under considerable doubt. This will now be subject to an “In or Out” referendum to be held before the end of 2017. The real threat of a UK exit from Europe will create uncertainty in the run up to a public vote and that will not be good for markets.
Share market gains likely to be short lived
When the realisation that the new political scene could lead to the prospect of renewed Scottish nationalism and a possible break up of the United Kingdom as well as a European exit, any rises in UK share markets seen now as a reaction to the outright Tory victory are likely to be short lived and unsustained.
USA overheating far more significant
However, all of these local issues should not take us away from the far more worrying prospect of a significant correction in the USA, which as I said in last months report, would be contagious for all markets globally. The S&P500 and the Nasdaq US technology index are both considered to be exhibiting signs of a possible bubble causing many analysts to fear a correction.
The bond markets too are vulnerable and this creates challenges particularly for new investments and those seeking income. Oil price volatility remains an issue and if the signals from black gold are to be believed, Brexit, Scoxit (never mind Grexit) will be the least of our worries. But all of that is in the future. For now we need to settle down to a new administration and hope that markets react rationally and sensibly to the new order.
Important Risk Warning Please read:
It is important to understand that this report is not intended as specific investment advice, only my opinion in broad generic terms, designed to provide a flavour of the markets and possible future outcomes based on the evidence at our disposal.
The value of investments can fall as well as rise and they are not guaranteed. Past performance is not a guide to future returns and you may get back less than you have invested.
If you are at all concerned about your specific situation and the investments you hold and you are not due a review soon, then you should contact us as a matter of urgency and we will review your attitude to risk and your portfolio to ensure it meets your requirements and is adequately protected from the prospect of a share market crash.