|
 And yet, investors are largely calm about the outcome, testament to
just how muted adrenal response can be in an age of faith in central
banks.
Prime Minister David Cameron met the Queen on Monday to tell her
Parliament was dissolved, setting the clock for a May 7 election.
Not only is it unclear whether Labour or the Conservatives will win
the most seats, polls being highly mixed, it is unlikely that either
will win enough support to form a government on its own, making
coalition or minority government strong possibilities. Fringe
parties, like the anti-EU UK Independence Party may play an outsize
role in forming, or scuppering, any coalition.
What's more, a 2011 law establishing fixed five-year terms for
parliaments will make it difficult for a weak victor or coalition to
call a new election in hopes of a more clear-cut result.
Cameron has pledged a referendum on British membership in the EU by
the end of 2017 should the Conservatives win, but even Labour,
strong supporters of staying in, might ultimately have to put the
issue to a vote. A vote to leave the EU might trigger yet another
vote over Scottish independence, something defeated last year.
In short, it is very difficult right now to know the future shape of
Britain, how and by whom it will be governed, as well as the
treaties, laws and regulations to which it will be subject.
Given all this, markets have been remarkably relaxed.
Sterling has fallen against the dollar, having one of its worst
months in the last couple of years, but while volatility is up, this
is within a low-volatility environment.
The benchmark FTSE 100 is up about 5 percent so far this year and
stands just off all-time highs, albeit a high set in December 1999.
Volatility on the FTSE 100 has been trending generally lower for the
past three months.
To be sure, investors, as a group, are fickle creatures and there is
every chance that they wake up one fine morning between now and May
7 and decide to panic, if only a bit. There is sure to be volatility
in reaction to evolving poll data. Signs of a Conservative majority
would be especially difficult for sterling, which then faces
so-called Brexit risk via the promised referendum.
Individual equity sectors such as banking could be hard hit too, not
to mention companies based in Scotland.
TIME OF FAITH
The strength of British institutions is reassuring, of course, but
still this is a remarkable set of uncertainties driving a remarkably
quiet market response.
Should Britain leave the EU it will be highly damaging to its
economy. Not only would London's role as the capital market entrepôt
of Europe face a threat, but EU countries are the most important
market and trade partner for Britain.
[to top of second column] |
Lower trade with the EU would knock British economic output down by
between 1.1 and 3.1 percentage points, according to a study by the
London School of Economics. Foreign investment would surely drop and
new roadblocks to skilled immigration might appear.
And Britain doesn't have to leave the EU to lessen its influence
over the direction and outcome of the European project. A referendum
might do that even if it ended in a vote to stay.
The quiet reaction in Britain makes an interesting parallel to how
markets are interpreting events in Greece. While Athens risks
running out of cash in April, and the chances of a euro exit, by
plan or by accident, must be rising, outside of the Greek securities
which could be redenominated into new drachma, the market impact has
been subdued.
That may well be because the effect of the European Central Bank's
new quantitative easing program is papering over the underlying
impact of Greek risks. That's possible if true, and possibly even
desirable, but not necessarily permanent.
For a long time, in the so-called great economic moderation ending
in 2008, investors thought we were living in permanently calm times.
Markets erupted when they realized this was not true, but the
effective actions, mostly of central banks, have taught investors in
the years since that it pays to bet the 'grown-ups' will sort things
out in a way which protects the economy and investors.
Local problems and instability have been less powerful than the
combined efforts of multilateral ones and especially central banks.
Britain's lesson may soon be that politics will one day matter
again.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
