With voter opinion fragmented in the lead up to the 7 May election, forecasts suggest a hung parliament looks increasingly likely. That would prompt the Conservatives or Labour to try to form a coalition government, or govern via a minority government if they are unable to reach an effective deal with another party.
This second scenario, where the ruling party does not have a majority in Parliament, is causing concern for fund managers, particularly as a single Parliamentary vote of no confidence would be enough to bring about a fresh general election.
Simon Brazier, manager of the Investec UK Alpha fund, said: “The collapse of the Liberal Democrat vote, the rise of UKIP, and the massive swing from Labour to the Scottish Nationalists in Scotland means it may be unlikely that a two-party coalition will be able to be formed.
“My prediction is Prime Minister David Cameron will hope his Conservative party wins a larger share of the public vote than Labour, which will give him the mandate to try to form a Conservative minority government. This can only mean widespread uncertainty as a minority government is inherently unstable, and a second general election would be likely to follow later in 2015.”
Brazier said this possibility may lead to businesses delaying investment decisions, which could prompt a vicious circle for corporates.
“In a worsening economic outlook, [UK equities] could be classed as expensive,” he said.
JOHCM’s UK Equity Income fund manager Clive Beagles agreed the prospect of more than one election would prove negative for UK equities. “A bad result from the elections would be no decision and another election before the end of the year,” he said.
James Dowey, chief economist at Neptune, said: “If we got past the first election and then a second election was called, there will be further uncertainty and it will be worse second time round. It will be unknown territory for investors.”
Dowey said his political sources suggest the Conservatives are budgeting for two elections this year, despite the current coalition government having introduced fixed-term five-year Parliaments in 2010.
The economist is also concerned over the prospect of another coalition government. He said a coalition could lead to either “market-unfriendly” policy requests from smaller parties or in-fighting that prompts a second election.
“There would be some constitutional hoops to jump through to call a second election, but it could happen if Parliament votes for it or there is a vote of no confidence.”
“Markets cannot do anything about [these scenarios] as they cannot rule them out,” he said.