Whilst preparing this commentary ahead of the result of the outcome of the general election, we like many were anticipating waking up to a Labour led minority government and trying to decide what this would imply for capital markets in the UK going forward. We were guided not only by the opinion polls but also the bookmakers, in the event it would appear that even the bookmakers could get it wrong.
For most of Thursday the betting was still predicting the Labour party would form the next government, irrespective of not winning the most seats. A BBC exit poll released shortly after voting closed suddenly changed that view. The poll indicated the Conservatives could gain seats from the last election, maybe not enough to lead to an overall majority, but enough to remain in power. One is reminded of the night the Labour party, under Neil Kinnock, failed in 1990 to defeat John Major’s Conservative party, against expectations.
As in 1990, at the last minute British voters appeared to decide that one should stick with the devil you know, and voted to keep the incumbent government in power. The change in expectations for the outcome of yesterday’s election result brought an immediate reaction in the capital markets. Sterling rallied, and overnight trading in the stock market indicated stocks would open higher when trading resumes on Friday morning.
Often at these times one gets the so-called initial “relief rally” that fades over the following days. Capital markets anticipate one outcome that may be considered investor unfriendly, and gets another.
Once the evening’s events have passed, and the dust settles it is quite possible the relief rally will fade as money managers once again re focus on the wider issues of Europe and the strength of the global economy. Janet Yellen adding fuel to the fears this week, warning in her opinion valuations in equity markets seemed stretched. Anecdotal evidence continues suggests these fears mean fund managers hold higher levels of cash than historically normal. Recent fund flow data continues to report capital coming out of equities. These wider concerns cannot be ignored, and may well lead to more volatility in equity prices. However there is an old adage that bull markets tend to end on a wave of euphoria, not fear.