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Time to make a call on the UK election

Markets were pretty soft this week and despite the bounce back today (Friday), equity markets look likely to end the week lower.

The small sell-off was due to the focus on the twists and turns of the trade war narrative. However, this week it is only right that attention is given to the UK election next Thursday and, ultimately, a view on what may happen should be declared.

Despite a wide range of election models predicting a Conservative majority, there has up until now been a feeling that that polls are highly fallible and even potentially suspect. This is because in 2017 the regional polls were predicting a significant majority for Theresa May but in the last week before the actual election Labour’s support surged and pollsters ended up with proverbial egg on their faces.

Could the same thing happen this time?

Well, one of the analysts well regarded and followed by the authors of this update – Jonathan Wilmot – has asked exactly that question. Using an election forecasting model based on constituency-level voting, regional vote swings and regularly updated data he has run two stress-test exercises.

In the first, he extrapolates the current trend of Labour Party support out for another week. In the second he assumes the same surprise boost to Labour Party support that occurred in the last week before the election in 2017, where the majority of undecided voters fell toward Labour.

Even after factoring in these assumptions, there is no scenario resulting in a Labour majority government. A hung parliament or a very narrow Conservative majority becomes plausible only if Labour can maintain their momentum and, on top of this, somehow replicate the last minute swing of 2017. Yet it looks like the momentum Labour were enjoying over the last week has lost some of its vigour whilst a larger proportion of the undecided vote is leaning toward the Conservatives (50%) than labour (30%).

So in the absence of a last minute surge in the polls for Labour, the most likely outcome is a Conservative majority.

How will this affect this pound?

Goldman Sachs estimate that long term global investors are still significantly underweight sterling in their portfolios so it is possible that they will start finding the courage to move money back into the UK and, on balance, this should help sterling.

In Summary;

Both regional and constituency level polling suggests the Conservatives can win a meaningful majority, these polls should be trusted, and the likely outcome should be good for the pound.

© 2019 GWM