December General Election

A general election was called in the UK because it was seemingly the only real way to get any kind of resolution regarding Brexit.

With three years of uncertainty and unresolved talks, I think many people on both sides of the Brexit argument just want us to leave the European Union with a deal and look to the future.

As a result of this and the untrustworthiness of Jeremy Corbyn, Boris Johnson’s Conservatives are strong favourites to win an overall majority in today’s general election.

However as demonstrated in the last general election, the opinion polls are not always correct, and we can’t take anything for granted.

So in this article I want to look at how the result of this election could affect both the domestic stock market and the British pound.

Conservative Majority

If, as expected, Boris Johnson returns to power with a clear majority, then this could have a dramatic effect on the markets.

For a start, the pound is likely to rally strongly against all major currencies, having been beaten down so much in the last three years.

It has recovered somewhat in recent months, but there is still the potential for the GBP/USD, for example, to go up to around 1.35, with some experts predicting that it could even go back up to around the 1.40 level.

A strong pound and a weaker dollar would ordinarily affect the profits, and therefore the share prices, of many of the leading FTSE 100 companies that report their earnings in US dollars.

However in this scenario, the volume of money being reinvested back into UK stocks may very well overcome this exchange rate factor, and result in some big gains in the coming weeks.

In fact it wouldn’t surprise me if the FTSE 100 rallied back to around the 7500 level in the remainder of 2019, which would represent a gain of nearly 4%, before rallying further in 2019 with an orderly exit from the European Union on 31 January 2020.

Hung Parliament

There is no chance of Jeremy Corbyn’s Labour party winning an overall majority, but there is still a chance that Jeremy Corbyn becomes prime minister if the Conservatives fail to get enough seats and Labour forms a coalition government.

It is hard to predict how this unlikely and unexpected outcome could affect the markets, but it is likely to be hugely disruptive and the repercussions could be huge.

The pound would almost certainly be sold off against all the other currencies as this would reintroduce so much uncertainty regarding the Brexit situation. Having not really made his position clear, we don’t really know when or indeed if we will be leaving the EU in the coming months and years.

This result would almost certainly see a stock market sell-off as well because some of the tax and financial measures proposed by Labour are not generally regarded as being as favourable to UK businesses as the Conservative’s proposals.

Therefore the FTSE 100 could very easily plunge below the 7000 level in the coming days and weeks as the reality of a Labour government starts to take hold.

Final Thoughts

Whatever happens, it is going to be a very interesting few days because the markets are likely to be very volatile and there could be some big moves in both the pound pairs and the domestic stock market.