The UK is now a week away from voting in the general election. At the time of writing, the Conservative Party held the lead in the polls although the gap against Labour has narrowed.

The current market rally, as represented by the domestically-focused FTSE 250 index, implies a Tory victory. There wouldn’t be any radical changes to how the country is run and Theresa May could concentrate on getting the best possible Brexit deal.

However, a lot can change in a week when it comes to politics, so investors should not assume that the Conservative Party is guaranteed to win when the public casts their vote on 8 June.

We will now look at five of the main political parties and the key points in their manifestos relevant to investors.

You can also click here to read a separate article exploring the manifestos from a personal finance perspective such as changes to tax allowances and pensions. In that article we look at how three groups – young professionals, working families and people in retirement – will be affected either under a Conservative or Labour Party victory.

It is important to stress that Shares is an unbiased publication when it comes to political matters.

Currency recovery

Before we dive into the individual manifestos, it is worth looking at the performance of pound sterling as another gauge of the market mood.

Although traders had been betting on sterling falling ever since last June’s Brexit vote, there were two key reasons why it has recently bounced back.

Firstly, it looked oversold against better than expected economic data. Secondly, markets seemed to like the decisive action taken by Theresa May to try and remove a major distraction to sorting out Brexit.

If the opinion polls are correct, the Conservatives could be in power with a much larger majority than in the current Parliament. ‘This would provide greater domestic political stability for the next five years, and give the Prime Minister a stronger base from which to negotiate the UK’s exit from the EU,’ says UBS strategist John Wraith.

The pound has gone from sub $1.20 at the start of the year to rest at $1.30 in late May. The pound really started to move when the election plan was announced on 18 April.

'Sterling is no doubt going to be the focus of the election fallout'  Connor Campbell

Different scenarios for the pound

‘Sterling is no doubt going to be the focus of the election fallout, especially given just how excited it got when Theresa May surprised everyone with her announcement,’ says Connor Campbell, financial analyst at Spreadex.

‘The gains the currency made in the aftermath of that announcement, combined with the forecasts for the election result, suggest that investors are seeking a big win for the Tories.

‘If that does happen then, dependent on how far the pound has strayed from $1.29-$1.30, the currency may see some slight gains but nothing too drastic, as the market has largely priced in that eventuality.

‘Any other result than a substantial Tory majority will likely be greeted by a sliding scale of disappointment. If the Conservatives fail to materially increase their hold on the House of Commons then sterling may fall, as in theory it would make the Brexit negotiations more difficult.

‘As for a Labour win or coalition government, this situation may see the most pronounced losses for the pound, if purely because it is the outcome that most complicates the Brexit proceedings.’

David Page, senior economist at AXA IM, believes sterling could start to weaken after the election result, even if the Conservative Party wins. It considers current Brexit expectations as being
‘too sanguine’.

‘In addition, while gilt yields should remain well supported with an increased Conservative majority, we still see room for some domestic policy surprises.’

A week ago, Page at AXA said he had considered the current state of polls and betting markets and come up with a few possible scenarios:

Increased Tory majority (probability 70%).

‘Conservatives win a majority of 40+ seats. Polls and betting market probabilities drive our central expectation for a marked increase in the Government’s majority.’

Little change in Tory majority (probability 15%).

‘Conservatives achieve a majority of 1-40 seats -– a status quo ante. Opposition parties would likely see this as a positive outcome. PM May remains beholden to the extreme factions of her party.’

A Conservative-Lib-Dem coalition (probability <5%).

‘Polls are wrong and Tory support is not that strong, while Lib Dems recover some ground. We see a similar likelihood of this electoral outcome to the Tory minority government discussed below. However, we consider a coalition with the Lib Dems as unlikely.’

Conservative minority government (probability 5%).

‘A more likely outcome should we see a modest reduction in Tory support than a Conservative/
Lib-Dem coalition. This would make governing difficult as the Tories would rely on support to pass major legislative bills. While some domestic policy may proceed, the Brexit negotiation process would most likely be severely undermined.’

A Labour-led government/coalition (probability 5%).

‘Polls are wildly wrong and Labour is able to form a government either outright, or in coalition with the Lib Dems, and/or the Scottish National Party (SNP).’ (DC)

CONSERVATIVE PARTY

In less than a year the UK has managed to reinvent investment property taxation, decided to leave the European Union, change prime minister, begin Brexit talks and call a new election.

Early polls following the snap election decision put the Conservatives in firm pole position but Labour has recently narrowed the gap. Election seat spreads (how many each party will win) appear to back a Tory victory, although by a narrower margin than the 150 seat majority assumed a week or so ago.

Such a result would ‘provide the wiggle room necessary to forge a transition agreement, which in turn is essential for the UK to avoid hard Brexit,’ says Will Hobbs, Barclays’ head of investment strategy in Europe.

Managing Brexit is high on voters’ agenda given its wide implications for UK plc but the NHS, education and immigration all remain hot topics.

Key Conservative policies revolve around £8bn extra healthcare spending by 2022/23, £4bn additional schools funding by 2022 and energy bill caps. Plans for later life care have come under intense scrutiny.

The Conservative’s proposed cap on gas and electricity bills for households that pay standard variable tariffs has already started to drag down shares in utility companies.

For example, British Gas-owner Centrica (CNA) has fallen about 6.5% during the past month and earnings forecasts have been cut.

Tighter rules on mergers and takeovers could scupper overseas buyouts of some companies, telecoms groups in particular. These would in future be viewed as national interest assets, although much of the UK’s communications infrastructure and services are already in foreign hands, such as Virgin Media, for example.

Theresa May intends to carry out a review of share buybacks by FTSE companies to stop them being used to hit performance targets artificially.

The ultimate drivers of company share prices and valuations are profit and, particularly, cash flow. Investors are advised to ideally focus on their long-term strategy and goals rather than get caught up in any short-term impact that a political event may have on performance.

‘Sticking with a buy-and-hold approach in funds and shares with good-quality underlying businesses will avoid missing out on long-term gains,’ say Barclays analysts. (SF)

LABOUR PARTY

The leaking of Labour’s draft manifesto on 11 May failed to trouble shares in various sectors threatened with nationalisation, perhaps because investors at the time were giving Labour little chance of winning.

Clearly Labour’s position has started to strengthen as we draw closer to the big vote.

If you believe Labour now has a stronger chance of winning, keep a close eye on the stocks that could be hit by nationalisation under its plans.

The principal ones are: postal delivery group Royal Mail (RMG), utility firms including SSE (SSE) and train operator Go-Ahead (GOG).

Labour wants at least one publicly-owned energy supplier in every region of the country, with the government controlling the transmission and distribution grids. The latter would be a negative for National Grid (NG.).

It is not clear how much a new government would pay to nationalise a listed business. You could assume that investors would initially panic sell these ‘threatened’ stocks if Labour were to win the election. However, we’d also assume there would be appetite by other investors take advantage of any sell-off and buy low in the belief that the government would ultimately have to pay a fair market price for nationalisation.

In the event of a Labour win, companies with government contracts would only be allowed to pay their highest earner 20 times more than the lowest.

High ranking management of UK-listed companies that work for the government including outsourcers Capita (CPI) and G4S (GFS) will be nervously awaiting the election result.

Labour’s manifesto also has implications for the gambling sector, as it includes a pledge to reduce the maximum stake on fixed odds betting terminal (FOBT) gaming machines in UK shops from £100
to £2. Such a move would be unhelpful for both Ladbrokes Coral (LCL) and William Hill (WMH).

Consumer facing stocks, including many retailers and purveyors of high-end goods, could see their share prices tumble if Labour wins, as the market may price-in a pinch on spending on life’s little luxuries.

Labour is pledging to source 60% of our energy from zero-carbon or renewable sources by 2030, a potential boon, one would think, for sentiment towards an array of renewables-focused closed-ended funds.

Examples of such funds include The Renewables Infrastructure Group (TRIG) to Greencoat UK Wind (UKW), Bluefield Solar Income Fund (BSIF) and John Laing Environmental Assets (JLEN).

It would mean Britain could be mostly powered by cutting-edge clean technologies that would also provide skilled jobs, fairer bills, and cleaner air.

Yet as Greenpeace UK’s head of public affairs Rosie Rogers points out, ‘backing community-owned energy projects and ditching the top-down imposition of unpopular fracking is a smart move, and a new drive to insulate millions of homes will help cut energy bills too. But setting targets is one thing: hitting them quite another. The jury will be out until the actual policies come in.’ (JC)

LIBERAL DEMOCRATS

The party’s manifesto promises significant new investment in health, social care and education. In particular, the Liberal Democrats wants to put 1p in the pound on income tax to boost spending on key public services.

The party wants to increase corporation tax from 17% (which is the Conservative’s planned rate from 2020) to 20% which could be deemed a negative from the stock market’s perspective.

Although this would boost government funding for investment in areas such as education and training, which is theoretically good for the long term future of the country, it would reduce post-tax profit for businesses.

A £100bn package of additional infrastructure investment should benefit construction stocks, engineers and infrastructure service companies, of which there are many on the UK stock market.

In terms of individual stocks, a pledge to invest nearly £7bn in education would, in theory, create a stronger market backdrop for education tech specialist RM (RM.).

A ban on diesel cars and small vans by 2025 would be bad for van hire firm Northgate (NTG).

Plans to take over the Southern Rail train franchise would be negative for Go-Ahead which currently operates the franchise in conjunction with French transport group Keolis.

On a broader market basis, investors may be interested to note the party’s plan to have women representing at least 40% of board members in FTSE 350 companies. The Lib Dems also want to increase ethnic minority representation.

Last year, a review backed by the current government expressed a desire that females would represent at least one third of FTSE 350 board members by 2020.

Elsewhere, the Lib Dems want to retain City of London’s rights in EU financial markets. That should be seen as a positive from an investor’s perspective. But the party’s plan to hold a second EU referendum would inevitably create a new bout of stock market volatility in the run up to the vote. (DC)

GREEN PARTY

Like Labour and the Liberal Democrats, renationalisation is firmly on the agenda for the Green Party. For example, it wants to take back control of the British rail network, putting franchises back in the public sector once existing agreements expire.

FirstGroup (FGP) and Stagecoach (SGC) would be negatively affected under this scenario, alongside the aforementioned Go-Ahead Group.

Energy, water and the Royal Mail are also on the Green Party’s hit list for services that it believes should be under public ownership.

Elsewhere, major investment in social care for elderly ‘and all those who need it’ could benefit the likes of Mears (MER). It provides care for older and disabled people who want to avoid ‘costly’ nursing homes and would like to continue living in their own homes.

The Green Party wants to ‘phase out’ coal, oil and gas plants and stop fracking companies from drilling the countryside. This would be negative for small cap oil firms such as iGas Energy (IGAS:AIM), Europa Oil & Gas (EOG:AIM) and Egdon Resources (EDR:AIM). (DC/LMJ)

UKIP

Although immigration is central to UKIP’s manifesto, the party has also gone strong on the tax angle with more generous benefits for many people. This includes a higher earnings threshold before you start paying income tax and the abolishment of VAT on household bills.

It wants to provide up to 100,000 new homes for younger people every year via high quality, low cost factory built modular homes.

In terms of stocks, defence companies like BAE Systems (BA.) and Ultra Electronics (ULE) would theoretically benefit under a UKIP government as the party wants to spend 2% of GDP on defence plus £1bn extra for the defence budget every year. (DC)

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