The stark difference between Labour’s and the Conservative’s ideological and Brexit negotiating stances makes today’s election the most important in recent memory. Like Brexit, the potential impact for the FTSE 100 is colossal, especially as markets are pricing in a comfortable Conservative victory…

Are the polls wrong again?

Brexit remains an unadulterated reminder of how polls and the collective intelligence of the markets can be wrong. Lest we forget, the FTSE 100 plummeted 549 points on the following day post the UK’s Brexit vote.

As I write, election polls point to a 50-seat majority for Theresa May’s Conservatives in today’s election. However, modelling investor turnout (expected to be a crucial factor to the outcome) as well as individual constituency idiosyncrasies is notoriously difficult. Here we note that support for the Conservatives has remained steady and hence whether Corbyn has been able to galvanise the politically disenfranchised and the ‘youth-vote’ is key.

With this in mind, let’s breakdown the three likely outcomes of today’s election and report the impact each will have on the FTSE 100.

The potential outcomes

Firstly, scenarios we assess are as follows: 1) a large Conservative victory (100+ seat majority), 2) a slim Conservative majority (30-50 seat majority) and 3) a hung parliament. Interestingly, this election sees our outlook for UK equites being less driven by the impact of individual party manifesto’s. Instead, we overweight the impact of how the above scenarios will impact ‘Brexit’ negotiations, the pound and subsequently the FTSE 100.

Large Conservative Majority – Were May to win a 100+ seat majority then this would unequivocally strengthen her Brexit negotiating hand. Crucially, it would also afford her the ability to stave off calls for the hardest of Brexits, as some Tory back benchers are baying for. Moreover, a large majority would dramatically reduce the likelihood of a ‘no-deal Brexit’ and see the Conservatives better placed to push their business friendly mandate. Under this scenario, expect a modest appreciation in sterling and an outsized equity rally. Here, investors should favour domestically focused sectors (specifically the banks, housebuilders and retailers). However, timing will be key as a ‘pop and drop’ move would be very much on the cards.