(Martin D. Weiss is on vacation this week. Mark Najarian, managing editor of Money and Markets, is filling in.)
Well, it’s clear what the markets thought of the shocking election result in the U.K.
The pre-vote polls said it was going to be an unbelievably tight result with no clear-cut winner. The polls were wrong. The center-right Conservative Party of Prime Minister David Cameron came out of the general election with a stunningly complete victory, thrashing the Labour Party of Ed Miliband and now will rule with a majority of Parliament seats.
Within minutes of the opening, the U.K. stock market surged nearly 2 percent, and the British pound jumped almost as much. The markets couldn’t be happier with the business-friendly Conservative Party victory. But even more, perhaps, investors were cheered by the fact that it was a clear victory. No coalition needed (like in 2010), no weeks of uncertainty, no behind-the-scenes maneuvering. And, no dramatic swing away from austerity, as a Labour government would likely have pushed.
“The decisiveness of the results is a big surprise,” James Beadle, a Monaco-based British investor, told Money and Markets. “Markets are clearly relieved that the results are decisive, and that the winning party sits right-of-center. Had Labour won, the market would have certainly suffered from fears of economic mismanagement and low-growth policies. Had the result been less decisive, it would have suffered the uncertainty of a protracted negotiation to form a coalition.”
|David Cameron and his wife celebrate election victory.|
A party needs 326 seats in Parliament to have a majority, meaning that the leader of the party has a right to form a government. In 2010, the Conservatives were the winners, but without a majority, and they were required to form a coalition with some unlikely partners, the Liberal-Democrats. But the Conservatives this time have taken at least 327 seats, and Cameron was hailing his party’s big victory and vowing to bring the country together (of course, all politicians of all parties say the same thing).
As the U.K. swings more to the left than the U.S., the Conservative Party is not as conservative as the Republicans in the U.S., and the Labour Party is generally more liberal than the Democrats. But the basics are the same: The Conservatives favor tax cuts, austerity, strong defense and have doubts about EU membership. The Labour Party is pro-EU and favors social spending, and especially wants to protect the U.K.’s free health-care system, the National Health Service.
So what does the election mean in the near term.? Here are a few points:
* Referendum on the European Union. Cameron has reluctantly promised to hold a vote on whether the U.K. should remain in the EU. Many have seen the sovereign debt crisis, Greek troubles, economic woes and currency weakness mixed with easy immigration policies and have decided the U.K. would be better out of the union. There is much railing against “European bureaucrats” deciding policies for the U.K., and Cameron, who wishes to remain in the EU (albeit with some modification of the rules), was forced to promise a referendum by the end of 2017.
* Another Scottish referendum or further “devolution.” The Scottish National Party, which favors independence from the U.K., scored major victories in the general election, winning 56 of 59 seats in Scotland. A referendum of Scottish voters in September 2014 came out against independence (55.3 percent “no”), but the renewed nationalism shown in this election could put pressure on Cameron to allow another referendum. Cameron could head off any calls for a new referendum by offering increased “devolution,” i.e. granting more self-rule powers to Scotland.
* Continued austerity measures. Under Labour, government spending would have been boosted and taxes likely would’ve been raised. The Conservatives will attempt to hold corporate taxes low and seek to get a U.K. budget surplus to prepare for any future global financial crises.
* Continued smooth relations with the U.S. Although they theoretically come from opposite sides of the political spectrum, Cameron and President Barack Obama have a decent relationship. Bloomberg Politics put it this way:
“Cameron is someone Obama already knows he can work with and one of the few world leaders whose company he seems to enjoy on a personal level. Obama’s nickname for Cameron? “Bro.” … Earlier this year, while visiting the White House, Cameron sought to back Obama up on getting Congress to hold off on new Iran sanctions in the middle of nuclear talks.”
As a long-time resident of the U.K., I would anticipate a vote to leave the EU would fail, as most people and businesses seem to like the idea of easy access to continental living, jobs and markets. It would also seem that Scottish voters were able to express their nationalism through the general election, and would again vote down independence, although that is less certain.
So going forward, many observers say, the Conservative election victory will likely provide a period of relative stability, which will support assets prices. And any hits to equities or sterling based on fears of an EU departure would provide buying opportunities given that, in the end, an exit would be unlikely.
We have a lot of U.K. readers, and I would be happy to get the views of those and others to the developments, especially after you’ve had a weekend to absorb the news. Click here to join the discussion.
P.S. Ken and Daria Dolan just posted the latest installment in their “Financial Heresies” video series — and it could put a LOT of extra money into your pocket! Click here to view this new video and to catch up on the previous two as well!