Investing under a hung parliament: James Spence of Cerno Capital comments on the SNP, gilts and equity​

Market participants are now fairly cognisant of all the possible outcomes in May’s general election. Indeed the SNP/Labour combination delivers so much from an SNP perspective that Nicola Sturgeon has not been shy in parading the merits. From an SNP perspective, it offers the kind of wealth redistribution that marries with their tastes plus a large dollop of influence over all issues of substance. They can be, alternatively, power brokers or mavericks to their hearts’ content. Some commentators view SNP/Labour as a less favourable outcome for the economy of London and would be in conflict with the free-market cosmopolitans such as Boris Johnson.

The less favourable outcome for markets would be one in which the Conservatives fail to win the largest share of votes but hold Cameron in No10 while he attempts to build a coalition. He then forms one but it fails. This process would be a matter of weeks, not days, and during that time, weakness in the FTSE100 and the international value of sterling would both operate as tandem indicators of constitutional confusion. Equity markets are inherently flexible, darker outcomes would ultimately effect the price of gilts. The feedback loop from higher yields on government debt would further pressure the political parties. At that juncture, the Governor of the Bank of England would need to become involved. A question arises as to BoE Governor Carney’s willingness to provide sufficient authority and direction to the parties, given his intervention would be seen, by some, as being political. These are not remote possibilities.

Ultimately, as the British have little love of prevarication and confusion, it is likely that heads would be knocked together so that a working government could be formed.