Financial markets are bracing for a highly unpredictable British election next week that in a worst case scenario could produce no workable government, a leading City investor told AFP.
But Luke Newman, European equities manager at Henderson Global Investors, which manages around 123.2 billion euros ($137.9 billion), said there was money to be made whoever comes out on top.
Question: How do political events impact the markets?
Answer: I think history has shown that political changes have had a real effect on markets, not only equity markets but also currency and bond markets.
A good recent example would be in the UK the Scottish independence vote last year.
As investors started to worry that an independent Scotland could lead to a push from England’s voters for more independence themselves and maybe exacerbate cause for a withdrawal from the EU, you saw not only an impact on bond markets but very visibly on currency markets and since that point sterling has been under pressure.
Question: How have you reacted to the situation?
Answer: I view this election in two different ways. First as a UK citizen, I’m very worried, but as a manager of an equity long/short fund looking to generate absolute returns, and with the ability to make money with share prices falling as well as rising, I’m very excited.
Because of the fracturing of political parties, the risk is that we end up not only with a weak government that doesn’t have the mandate to exercise its manifesto or promises, but the real risk is we end up with no workable government at all.
Leaving aside political views… markets are concerned and would worry about a change of government and the installation of a Labour party which has increasingly moved to the left on Ed Miliband’s leadership.
Because of that, it becomes quite easy to see how we can make money on the short side of the fund if the Labour party formed the next UK government.
Tighter regulation of energy companies, tighter regulation of transport fees for bus and rail companies, restriction on government outsourcing contracts to the private sector, legal restriction for bookmakers and gambling.
The area or industry that could prosper under a Labour government could well be the house building industry. Labour have been very clear there’s a lack of affordable houses.
Question: Do the markets prefer a Conservative victory? And what about a parliament without a clear majority?
Answer: (A parliament with no clear majority would generate) a great deal of uncertainty which would be reflected in the currency, equities and fixed income markets.
David Cameron’s party is a centre-right party, historically very business friendly and there would absolutely be a positive reaction to a Conservative victory.
The complication in my mind involves the UK relationship with the EU. David Cameron has been forced to offer a referendum on the UK’s place in the EU before 2017 to pacify the eurosceptics side of his party and also to combat the rise of the UK Independence Party UKIP which has emerged from nowhere to become a significant force in UK politics…
This would create a great deal of uncertainty, firstly the period before a referendum would cause a hiatus in investment decisions particularly for multinational companies looking to invest in the UK in manufacturing assets in particular.
Why would you invest if you could not guarantee it would be part of a common trading block in Europe?
The current polls says that a vote today would see the UK public vote to remain in the EU. In a scenario where that went the other way, it is hard to see how that could be anything but negative for the UK economy.