'Very real possibility' of a hung parliament, UBS says

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
SALFORD, ENGLAND - NOVEMBER 19: (AVAILABLE FOR EDITORIAL USE UNTIL DECEMBER 19, 2019) In this handout image supplied by ITV, Prime Minister Boris Johnson and Leader of the Labour Party Jeremy Corbyn answer questions during the ITV Leaders Debate at Media Centre on November 19, 2019 in Salford, England. This evening ITV hosted the first televised head-to-head Leader’s debate of this election campaign. Leader of the Labour party, Jeremy Corbyn faced Conservative party leader, Boris Johnson after the SNP and Liberal Democrats lost a court battle to be included. (Photo by Jonathan Hordle//ITV via Getty Images)
Prime minister Boris Johnson and Labour leader Jeremy Corbyn answer questions during the ITV Leaders Debate at Media Centre in Salford, England, on 19 November. Photo: Jonathan Hordle/ITV via Getty

One of UBS’ top economists said there is a “very real possibility” of the 12 December election returning a hung parliament.

“On the basis of opinion polls, a Conservative majority seems like the most likely outcome,” Dean Turner, UBS wealth management’s chief UK economist, told journalists on Thursday. “But I would caution that for a number of reasons confidence in that view isn’t very high.

“There is still the very real possibility of a hung parliament and that is something that as investors we’re going to have to think about.”

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Polls point to a strong lead for the Conservative party ahead of the vote next month but investors are wary of relying on the numbers after the party lost their lead in the 2017 election. The emergence of the Brexit party and the unpredictable way Brexit has driven voting since the 2016 referendum has also contributed to scepticism.

Turner said the pound and stocks would likely trade sideways under a hung parliament. This result would likely lead to an extension of the Brexit timetable, Turner said, removing the risk of a no-deal Brexit but extending Brexit uncertainty.

Turner’s comments came during a briefing with journalists about UBS’ views on the investment landscape in 2020.

Mark Haefle, UBS wealth management’s chief investment officer, said politics were likely to play an outsized role in the markets next year.

“Normally we tell our clients, don’t focus too much on the headlines around politics because that can be detrimental to your investment portfolio,” Haefle said. “I think we would still say the same thing this year but we also recognise that in this year politics is key in many ways.”

Haefle said elections in the UK and US, progress in US-China trade wars, and the evolution of fiscal and monetary policy would all put politics in the spotlight next year.

“The first is stick or twist, and that means do we stick with the current political feel to administrations, if you want to look to the election in the US and UK, or do we change?” Haefle said. “Clients around the world are asking about this.

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“The second thing is deal or no deal. I firmly believe that none of the negotiators in this trade dispute know what President Trump and President Xi will actually do and they’re trying to create options.

“The final topic is monetary and fiscal policy,” he said.

Former European Central Bank governor Mario Draghi said earlier this year that monetary policy may have reached its limits, with interest rates low or negative around the world. He urged governments around to start spending to boost economic growth, rather than relying on interest rate cuts to spur GDP.

“From here, how monetary and fiscal policy work together will ultimately be something of a political decision,” Haefle said.

Turner said an increase in government spending in the UK was inevitable whoever won the election.

“Every political party appears to have discovered a forest of magic money trees,” he said.