Minority report: Election 2015, which businesses should be concerned?

With only 17 days until the UK General election, the two main parties remain deadlocked in the polls, which have moved little since the start of the campaign. The Conservatives’ strong lead on the economy and on leadership, has not been accompanied by enough of a detoxification of their party brand to pull ahead. The Labour Party is more trusted on its values and motives, but the public remains wary of its capacity to govern. The static nature of the polls has extended to the insurgent fringe and nationalist parties’, whose respective bubbles are yet to burst. These parties remain likely to have a considerable impact north of the border and in marginal seats across the UK.

There remains, however, enough time for things to change. Numerous debates have been held, and there are more to come. There has been a steady drip of policy announcements in recent weeks culminating with the publication of each of the party manifestos. Both of these things are unlikely to move the needle in one party’s favour. If there is to be a breakthrough moment, in the age of 24/7 media, it is most likely that it will be down to an unscripted event.

While the Westminster village continues to speculate on seat projections and the make-up of the new government, this article will examine these issues, but also explore which sectors stand to be most impacted by the result of the upcoming election, whoever is victorious.

Formal coalition is unlikely...

All polls currently point to a hung Parliament being the most likely outcome, and there are a number of permutations and combinations of coalition, or minority government, that have been trailed in the press. However, there are a number of good reasons to think that if the next Parliament is hung, we will have a minority government rather than another coalition.

If we assume, as most current projections do, that neither the Conservatives nor the Labour Party win more than 300 seats, then there are a limited number of realistic formal two-party coalition possibilities. Both main parties have ruled out a formal coalition with the SNP, who are predicted to win between 40-50 seats. With the SNP out of the picture, and given that a grand coalition between Labour and Conservative parties would be extremely unlikely, that leaves the Lib Dems, currently expected to gain 25-35 seats, as the only other serious potential formal coalition partner to the Conservatives or Labour.

But there are considerable obstacles to the main parties going into coalition. The Lib Dems’ brand has been severely damaged after its time in government. They will be wary of the pitfalls of being a junior coalition partner once more – unable to take the credit for policy successes whilst often blamed for not delivering manifesto pledges. Beyond this, there are other party political issues to overcome.  A Lib-Lab coalition will not be easy. There is much bad blood between the two parties at activist level, and in Westminster. At least in this government, the Lib Dems have played the role of the nice guy. In a future coalition with Labour, they would be more likely to be cast as the nasty partner pushing for fiscal discipline – hardly a great way to begin repairing the brand. From Labour’s perspective, a Lib-Lab coalition could split the party and Ed Miliband is likely to prefer to govern as a minority Prime Minister in order to prove Labour’s credentials as a party of government. Relative to 2010, which was in the aftermath of the financial crisis, there is no national urgency to form a durable government via whichever means possible.

A formal partnership between the Lib Dems and the Conservatives will also be tricky. With a considerably reduced number of seats, the Lib Dems would have even less influence within a Conservative-led government that will surely be pulled to the right by MPs who feel that the Party failed to adequately represent core Conservative ideals during the last Parliament. The Lib Dems may choose instead to rebuild the brand by staying out of government and offering support on a confidence and supply basis only. However, this approach would pose its own risks as the Party may return to its former role as more of a party of protest, than a party of government.

Let us lot also forget the internal party dynamics which will be obstacles to any formal coalitions. On the Conservative side, the 1922 Committee, an influential group of backbench MPs, will demand a ballot of MPs before a second coalition is agreed. Many Conservative Parliamentarians will be likely to oppose a formal coalition as they want to see more authentic Conservative policies take precedence over the demand of others. The Labour Party will most likely need the consent of its MPs and its national executive, which represents its membership. The Lib Dems have the most complicated procedures of all. A formal coalition will require agreement from 75% of the federal executive, which is made up of 30 members elected by the party; and also 75% of the Parliamentary Party made up of MPs and Peers. If this is not attained a 66% majority is required at a special conference.

It is not possible to rule out a coalition, but given the above, it looks like if neither main party can secure a majority, we will have a minority government with the major party supported on a vote-by- vote basis by either the SNP and/or Lib Dems (Labour) or the Lib Dems and/or the DUP (Conservative). UKIP, Plaid Cymru, and the Greens are unlikely to be consequential as none of these parties is projected to get more than a handful of seats.

What are the implications of minority government?

Minority government will lead to uncertainty in terms of how durable the government will be and what policy outcomes will hold sway given the political pressures of securing support from others. History tells us that minority governments have not lasted - the longest was Labour in 1929-31, but the Fixed Term Parliaments Act (FTPA) of 2011 will have implications for this. Fixed five year terms can be annulled if more than two thirds of all MPs vote to call an election. For this to happen would be unlikely as it would require a sizable rebellion from within the major governing party.

However, there is another way that power can pass from one party to another – and this would not require an election. A fixed five year term can be cut short if a motion of ‘no confidence' in the government is passed, and a new government is formed, which wins a vote of confidence within 14 days. If a vote of no confidence is not won, Parliament will be dissolved and another election duly called.

So, the FTPA actually may well lead to more uncertainty in the event of a minority government than there would have been in the past and, unintentionally, it may throw up some perverse incentives -   if a government collapses in the next Parliament the smaller parties that would be responsible for the collapse might end up as kingmakers in the next one. Due to the new FTPA, a government collapse and subsequent transfer of power may now be achieved without an election, meaning that the incentive for the opposition and smaller parties to bring down the incumbent will have undoubtedly risen – they will now be able to plot and undermine without having to explain themselves to the voters in an election.

Is this uncertainty already priced in to the markets?

While the final month of the campaign plays out, we are already starting to see the markets react. Equity markets so far seem unperturbed by the strong prospect of a hung Parliament and weak government - the FTSE 100 recently broke through the 7,000 barrier and has briefly breached record highs. However, as an uncertain outcome to the election has become more likely in recent weeks, sterling has come under heavy pressure. Sterling weakness has already kept hiring managers from finalising job candidate decisions until after the election and key investment decisions will also inevitably have been postponed.

The disparity between recent currency and equity market reaction is curious. Sterling weakness may help many of the exporting arms of the large international corporates that constitute the FTSE 100 and this may be one explanation. Another reason may simply be that it is less clear how equity markets will broadly be impacted - specific sectors may be affected by the outcome more than others and some sectors, including banks; betting companies; utilities and energy companies; who could be adversely hit by the Labour party’s polices, may also suffer disproportionately if a Conservative-led victory provoked worries over a British exit from Europe. For some, a substantially lower chance of the UK leaving the EU is more important than restrictive domestic regulation; for others, the opposite may apply. The relatively sanguine equity markets may even be simply a function of our globalised marketplace. The British General election may be invoking uncertainty, but perhaps this does not rank alongside other international market developments such as the various and multiple rounds of QE that have propped up asset prices across the globe.

What can we learn from previous elections?

Research on UK General elections post 1987 has shown that there tends to be more volatility in equity markets and share prices after a general election rather than before. AXA wealth, for example, has compiled research which shows that the FTSE All-Share has swung more dramatically in the three-months following polling day compared with the three months before. However, history may not necessarily be a good indicator as the results of most previous elections, unlike this one, have largely been foregone conclusions long before polling day.

AXA has also found that particular sectors perform better in the uncertain period before an election, while others are more likely to make gains in the more certain period after the poll. Mining stocks, for example, are more likely to outperform the market prior to elections, whereas financials perform most strongly in a more settled political environment.

Which sectors are likely experience stock price volatility?

Housebuilders

The UK’s largest housebuilder, Persimmon, recently complained that the construction of new homes is being held up because local councils are delaying planning decisions in the run-up to the election. Labour’s mansion tax proposal is likely to slow the top end of the market, particularly in London and the South East. Ed Miliband’s “use it or lose it” powers to encourage developers to build, could also negatively impact share performance. Further plans for three year rental tenancies and a cap on rent increases will adversely impact commercial landlords.

However, each of the main parties have  promised to increase the affordable housing supply, which will help companies focused on building at the lower end of the market. The Conservatives pledge to extend “help to buy” and to introduce a help to buy ISA will ensure that there are likely to be both winners and losers as a result of policy in the sector.

Financial Services

Big banks may feel threatened by the Conservative party pledge for an EU referendum, which would jeopardise London’s position as the financial capital of Europe, but there are other reasons for the sector to be concerned. The bank levy, which has now been raised multiple times since its introduction, could rise under both parties, which will impact large British multinationals banks negatively once more.

The Conservatives have also vowed to issue at least 15 new banking licenses over the next five years in order to introduce new challengers into the sector. They have also pledged a review of financial consumer protection, which would examine the possibility of caps on pension charges; improving rights for older consumers in the mortgage market; and promote competition for savers.

The Labour party has pledged to introduce a market share test and “at least” two challenger banks, which could also the larger retail banks. Labour has pledged that it will also introduce a new levy on payday lenders and end unfair tax breaks used by hedge funds.

Large incumbent retail banks, already hit by a plethora of regulatory actions in this Parliament, are likely to be faced with more upheaval in the next, regardless of who is in office.

Energy & Utilities

Labour has pledged to freeze energy bills until 2017. During the freeze, the market will be reformed, with the generation and supply businesses of the ‘Big Six’ separated. This will see electricity sold through open exchange, whilst tariffs will be simplified. Since Labour announced these plans in September 2013, shares in Centrica, have tumbled by approximately 40% and shares of other listed energy providers have also come under pressure. Additional uncertainty may emerge in the form of a pledge to create a new energy watchdog to enforce Labour’s reforms. The body will have power to strip energy companies of their licences if they are deemed to harm the interests of consumers.

Water companies also stand to be impacted. Labour has pledged that all water companies will be required to sign up to a new national affordability scheme, helping those who cannot afford to pay their water bill. The industry regulator, Ofwat, will be strengthened to change licenses, limit price rises and enforce industry standards.

However, there will be some potential winners from Labour party policy. The Green Investment Bank will be given additional powers so that it can invest in green businesses and technology. The party will also pledge to make Britain a world leader in low carbon technologies over the next decade, which it hopes will create a million additional green jobs.

The Conservative party has pledged significant expansion in new nuclear and gas, and they remain committed to support the development of shale gas. They have also said that they will provide start-up funding for new renewable technologies and research, but will only give significant support to those that clearly represent value for money. Wind energy providers may suffer as the Conservatives have pledged to halt the development of onshore windfarms by ending any new public subsidy, and changing the law so that local people have the final say on windfarm applications.

Health

Labour has said that they will impose a cap on any profits that private companies, involved in providing clinical services, can make from the NHS. They will also repeal the Government’s 2012 Health and Social Care Act, thus scrapping the competition regime. Both of these measures will hit private providers and investors will have to take note.

Transport

Opportunities may exist in this sector via infrastructure projects, although a weak government may find it impossible to push more contentious projects through. Both main parties currently back HS2 and the expansion of UK aviation capacity, and the Conservatives have pledged to go further and back plans for HS3, along with a number of other improvements to transport and connectivity across the UK. The Lib Dems oppose airport expansion in London and this is one policy area which may be a red line.

The Labour Party has made a number of pledges that may impact share prices in the sector. As rail franchises expire, Labour aims to review the rail franchising process and put in place a new system. This will include a new National Rail body and legislating so that a public sector operator is allowed to take on lines and challenge private train operating companies. These changes may impact groups such as First Great Western and CrossCountry Trains.

Labour has also said that City and County regions will have more power over the way buses operate, by deciding routes, fares, and bring together trains, buses and trams into a single network with smart ticketing. Although this might benefit customers, it could have a negative impact on large bus operators such as Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach.

Outsourcing

The UK’s biggest outsourcers face possible share price falls because of worries over the Labour requirement for public listed companies to report on whether or not they pay the Living Wage potentially forcing them to pay all workers more than the minimum wage, or the so-called living wage, in exchange for government contracts.

In conclusion

If we are leading towards a hung Parliament, as the polls suggest, there are a number of forces that would lead us to believe that might push the eventual outcome towards a minority government. There is sufficient historical evidence to suggest that the political uncertainty surrounding such an outcome could have a negative impact on both currency and equity markets. While we have already seen a fall in sterling in anticipation of a prolonged period of uncertainty, we are yet to see any similar reaction in UK equity markets. However, history tells us that an equity market reaction to an uncertain outcome should also occur and that this will most probably happen in the aftermath of an election. How this manifests itself will most likely be sector dependent and stock specific, but investors should pay attention.