Prospects of inconclusive election result fuel uncertainty

Doubt surrounding the upcoming election is weighing on investor sentiment and increasing volatility in UK currency markets, which could send waves of uncertainty rippling through bond and stock markets.

With investors facing the probability of an inconclusive election result for only the third time since 1945, market attention has focused intently on the possible outcomes, which are numerous and worrying, according to a UBS report published today.

"There are risks on both sides of the policy divide and markets are going to have to get used to it," said Chris White, head of UK equities at Premier Funds.

The tense negotiations likely to arise from a hung parliament, as well certain policies that alarm investors, such as an EU referendum and Scottish devolution could make the UK a less attractive, riskier place for investors that would in turn rattle markets.

"The uncertainty that comes from a minority government is something the UK isn't really used to," said Dean Turner, an economist at UBS Wealth Management. "It's unlikely we'll get a strong coalition or the kind of cohesion we got last time. That will lead to a risk premium on UK assets," he added, noting that UK share prices could come under pressure.

Although the FTSE 100 has soared to record highs in recent weeks, investor fears ahead of the election have been manifested in fund flows, which have seen investors pull some $2.2bn out of UK-exposed equity funds since the start of the year.

But on top of the uncertain outcome, this year's election raises new concerns that investors have rarely faced.

Although the Conservative party is typically perceived as the party of business, UBS highlights the fears surrounding a referendum on UK membership of the European Union - as promised by the Tories - as the most acute concern for markets.

UBS warns that a referendum would mean international investment in the UK could be pared back, consumer confidence could be hit, job creation could slow and sterling could be clobbered.

Sterling has already come under heavy pressure as investors tread warily around the UK, and the currency slumped to a five-year low of $1.459 versus the dollar last week.

"Sterling could find it has to take the strain. There is a risk of an old fashioned sterling crisis," Mr White said.

UBS highlights the "wild card" of Scottish devolution raised by the strength of the SNP, which "stokes fears about fiscal credibility".

"Investors are faced with a choice - it is either Brexit if we get a blue leaning government, or concerns over fiscal policy if we get a red leaning administration," Mr Turner said.

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