Forecasters have dampened expectations for a large re-rating in UK shares if the Conservatives are the clear winners at the general election
Thursday 05 Dec 2019 Author: Daniel Coatsworth

The FTSE 250 index may only jump by 5% in a month if there is a Conservative majority after the forthcoming general election, according to predictions by Waverton Investment Management’s chief investment officer William Dinning. This may be viewed as a relatively small increase by many investors expecting a very large bounce in UK equities on a Tory election win.

‘We have not suggested that a Conservative majority will lead to a roaring bull market because in our view there remain a lot of challenges to overcome that will keep an “uncertainty discount” on UK assets, but a much reduced one from that which has afflicted the country for much of the last three and half years,’ explains Dinning.

Investment bank Jefferies argues that a Conservative victory is already partially priced in to the value of UK shares. ‘Since June 2019, the FTSE price-to-earnings ratio has already moved 9% higher in lock-step with Boris Johnson’s progress in the polls. We also think Brexit will hurt more than constructive policy measures can help,’ it adds.

Based on a review of poll data, betting markets and market calculations for potential end-scenarios, Waverton believes there is a 60% probability of a Conservative majority outcome.

It has a 1% chance of Labour majority following the election, yet investors shouldn’t rule out any scenario until the results are in as the world of politics can experience wild swings in terms of sentiment and support in the run-up to the big vote.

A Labour majority could trigger a 10% slump in the FTSE 100, a 15% decline in the FTSE 250 and a 20% fall in the value of sterling, according to Waverton’s forecasts.

Jefferies also believes a Labour victory would be bad for equities, but actually good for UK GDP. ‘Our assumption is that if Labour is elected, it is because the people want to vote in another referendum. In this case, there is a good chance that Britain remains in Europe and the UK Government provides significant fiscal stimulus,’ it adds.

It reckons there is only a 30% probability of a Tory majority, although in this case it believes Brexit looks near-certain with a 20% chance of ‘no deal’. The investment bank also believes there is a 30% probability of a Labour-led coalition.

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