THE City did its version of a jig of sheer relief yesterday that equities and forex markets are not going to face months of uncertainty stemming from a hung parliament.
David Cameron and the Tories performed better than all the polls predicted, and markets believe that the overall Conservative majority will allow them to continue with their austerity and fiscal consolidation policies, while keeping corporation taxes lower than Labour would have done.
Ahead of the poll, all expectations were that we would see a notably less decisive outcome, possibly raising the prospect of a second election later this year, with all the uncertainty that would have brought.
Markets feared there might be a nightmarish, fragmented electoral outcome, raising the prospect of all sorts of political combinations that could create a choppy backdrop for business. To say they are relieved at the clarity is an understatement.
Transparency of outcome should encourage both financial and business investment, helping to provide support for equities, sterling and gilts going forward.
In their jubilation, the markets take a distinctly narrow view on what is best for the investment climate. Not for them at this stage worries about the significant constitutional issues hanging over the British political landscape, with the SNP utterly rampant in Scotland and the Liberal Democrats badly mauled across the whole of the UK.
The FTSE 100 index jumped 2 per cent, shares in utilities, banks and housebuilders surged. The pound hit a six-year high against the dollar and euro, Britain’s currency also taking an optimistic view of the election outcome. The markets tend to feel viscerally that the Tories are more reliable on keeping the economy and the national finances steady.
However, even though the markets’ kneejerk reaction is predictable, uncertainty could return when the dust settles.
As Andrew Wells, global chief investment officer of fixed income at Fidelity Worldwide Investment, said yesterday: “Whilst the Scottish Nationalists did not campaign on a ticket of devolution, the magnitude of support for them must herald change in the future, and this will cause greater uncertainty.”
Businesses and the financial world are also likely to be relieved that Ukip did not have a good election. This will be seen as positive in terms of any European Union referendum, as business is pretty uniform in wanting to stay in the EU.
However, I think there could be a reaction to the euphoria as the weeks and months pass. Cameron will have an overall majority, but it is a thin one and looks vulnerable to backbench rebellions. There are echoes of John Major’s difficult situation in this regard in the mid-1990s that paved the way for the Blairite New Labour government.
As this sinks in, financial markets may row back a bit, and actually wonder whether a government with a small majority is inferior to the coalition it replaces.
No-one would claim the Conservative/Lib Dem coalition was in any way perfect, but people will probably not look back on the last five years and believe it was a disastrous stewardship of the country, either.
We have muddled through, the economy has recovered, jobs have been created, and the deficit has come down. The Conservatives pushed through their austerity programme; the Lib Dems provided stabilisers.
Time will tell whether a justifiably exultant Cameron can keep the momentum going.