Hung Out to dry!

By Marco Pietropoli, May 2010

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Hung parliament in the UK 2010 election


The great British public have spoken! After all that bother of the election we have no government. This is a very weird state of affairs for the UK. Many other countries are used to the process after a hung parliament, but for us this is difficult to understand.

A Conservative and Lib Dem coalition is by far the most likely to bring stability. But even if an initial agreement can be achieved, there is no guarantee that the leaders will be able to keep their parties united for the life of a parliament.

A Labour led coalition would mean deals with lots of small parties which would be far more unstable. It would also give the minority parties disproportionate power well above the mandate they have.

As it stands the Liberal Democrats have too much power. They came third but seem to be holding all the cards and the keys to No 10. How can this be right? Mr Clegg is even going to have a strong say in the Labour leadership contest. What is that all about?

What matters to me of course is how all of this going to affect the markets and my clients' investments. We can assume that any coalition government is going to struggle to implement a true austerity program. The real problems will be in the delivery not in the planning. Without strong leadership it will be difficult to stand up to the unions and to make the difficult decisions that need to be taken.

Worst case scenario is an ongoing farce of discussions and arguments and we then have to call another election in the next few months.

Uncertainty and instability will put continuing downward pressure on the Pound which will continue to push up inflation as we are an importing nation. It may get to a point where interest rates have to rise steeply to save the pound from collapsing. Sharp moves in interest rates will have a disastrous impact on consumer spending and on the housing market which will result in significant further losses to the banking industry and a further squeeze on credit availability.

If we ignore the worst case outcome we still face very significant austerity measures in the next few years. The Europeans are our main trading partners and they are also entering a period of austerity, so it is difficult to see where the growth is going to come from.

I am very happy with how we are positioned for what is to come. We can only guarantee a great deal of volatility. If you are on the right side of the trades it could be a very profitable time. I would suggest that playing it more cautiously at present would be a good idea. But many of the traditional places of relative safety may turn out volatile as well in the next few years. So be careful!



                                                  Medway Independent Financial Advisor