Understandably, many people dislike the idea of mixing politics with business and finance. Sadly, it is unavoidable, particularly as we head towards the most contentious General Election in living memory this coming Thursday. Here is a country that is hugely divided on BREXIT and social inequality, that needs to make decisions on the changes it wants to implement for the next five years or not. Do they want another year or two of further debate, indecision, inertia and deadlock over BREXIT, courtesy of a Lab/Lib-Dem/SNP coalition with investors sitting on their hands in frustration? Many are of the opinion that if you take in to account the fall in the Pound over the last 3.5 years, the FTSE 100 is possibly 20% undervalued. In June 2016 Cable drifted from $1.50 to $1.25 in a heartbeat and has bounced around between $1.25 and $1.35 in that period, often trading at the lower end of the scale.   A working majority of say 40 for the Conservatives could see the rate back to about $1.35. It has already moved from circa $1.28 to $13150 in the last month. This move has manifested itself with market economists, observers, fund managers and dealers having seemingly assumed that a Tory government is likely to be returned with some sort of majority on 12th December 2019. I am not sure I share their confidence. However, presupposing that its judgement is not impaired, we could also see equities (FTSE 100 and 250) heading towards a Santa rally.

Whether a resulting rally can be maintained remains to be seen. There is also plenty of money for investment in the UK from infrastructure to technology. Also, with Sterling still looking cheap, regardless of the recent bounce, M&A activity is likely to select another gear, once there is some clarity. Confidence is an ingredient one cannot have enough of. It is infectious and here in the UK we have been short of it. A working Conservative majority would initially do wonders for the economy. A small majority would make it tiresome to govern and a coalition would also certainly mean a meaningless renegotiation of BREXIT and a second referendum, which would make the nation even more divided. If a Conservative government is returned and there was a decent outcome to the ‘Withdrawal Agreement’ and subsequent BREXIT trade negotiations (that is a big ask), GDP, according to some distinguished economists such as Panmure Gordon’s Simon French could reach 1.5% in 2020, rather than the rather anaemic 1% currently touted by most economists.

The final option is a Labour victory. The City and business may be uncomfortable with that outcome. A bloated public sector, financed by gargantuan borrowing in excess of good borrowing for infrastructure products and higher taxation, could kill off incentive and discourage investment, which this country desperately needs. This could result in lower revenues for the Treasury which it would need for public services. Growth could probably fall below the Plimsoll line leading to increased unemployment. These are all suppositions, but certainly some commentators in the City are more worried about a Corbyn government than it is about BREXIT. 

Does the majority of electorate want a total change, and could it vote for a left-wing Corbyn/McDonnell led Labour administration that will deal with social injustice by ballooning the public sector, which could necessitate a dramatic increase in borrowing and increased taxation?  There is no doubt that the young are thoroughly disillusioned with the status quo. Incomes have been compressed. Getting on the housing ladder is proving very tough. The necessary austerity imposed in 2010 has bitten hard and affected the NHS, social services (Universal benefits), care for the old and education. I think a Johnson government appreciates that austerity must end, but do the young believe him? He has certainly thrown caution to the wind with an innovative programme, but so has Labour. 4 million new voters have been registered in recent months – many of them 18-30 years of age. Most are incandescent with anger. However, the weather is supposed to be bad on election day. How many will stay in the pub or in bed?

The City and financial services are responsible for about 11% of GDP and circa £70 billion of revenue for the Treasury – not huge but measurable. Many do not care about the City, but from the world of finance everyone’s life evolves. Under Labour the City would contract and so would investment – a major consideration for some but many would be ambivalent. However, would another two years of bad-tempered wrangling over BREXIT be an economic bridge too far! Many are of that opinion. Welcome Friday 13th December! What does it hold in store?

David Buik

Core Spreads

Core Spreads is financial trading as it should be. No noise – just tight spreads on thousands of markets.

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