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.

Discuss Article

  1. Jeremy Beckwith - Kleinwort Benson says:

    Accepting your argument, it is in the interests of either Labour or the Conservatives to carry on as a minority administration rather than enter a formal coalition. That way they avoid the electorate getting used to the idea of coalitions running the country and the Lib Dems are still forced to vote with them or else being accused of creating uncertainty and blamed for all the ills of the country – thus leading to a second election at which both parties seek to take votes from the Libs.

    Posted on: 06/04/10 | 12:00 am
  2. Doug Brodie says:

    Richard, Richard, Richard…..Springstein??? Surely a chap called Woolnuo… Woolnug…Woulnu… called Richard will know how to spell 'The Boss'!

    Ah, I see, but yes, the little trick worked – now you know who actually reads the blog…..

    Posted on: 06/04/10 | 12:00 am
  3. David Parkinson, Royal Bank of Canada says:

    Gents, just read the latest Bondvigilantes post. I agree that the ability (let alone the appetite) of the Libdems to paralyze the government through brinksmanship is overstated. Professor Curtice, who wrote our election guide, also points out that whilst a wide range of Conservative leads in the polls (0% to about 11% on a uniform swing) would produce a hung parliament, the subset of results that would allow the LibDems to creat a majority by adding their seats to EITHER conservatives of labour is much smaller (between about 4% and 7%) . Any Tory lead over 7% would mean the Libdems could only choose whether to allow the Tories to govern or not, which is no choice at all. They would not be able to form a majority with Labour in these circumstances…

    Posted on: 06/04/10 | 12:00 am
  4. Anonymous says:

    Are you joking? A hung parliament and we'll all be voting again around about October. PIMCO are on the money as far as UK bonds go.

    Posted on: 06/04/10 | 12:00 am
  5. erick says:

    you have done good research work but can you give with more statistics

    Posted on: 07/04/10 | 12:00 am
  6. longodds says:

    Change "hung" to balanced and you can have a different perspective.
    The coalition government in Wales and the minority Scottish government are both doing nicely. People I speak to are warming to co-operation rather than macho gladitiorial government .

    Posted on: 08/04/10 | 12:00 am

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