POPULAR opinion seems to have deemed Liberal Democrat leader Nick Clegg as the winner of the recent television debates. If voters act according to the post-debate opinion polls, the outcome to the UK general election on May 5th will be a hung Parliament.
As a rule, investors do not like uncertainty, and, at first glance, a hung Parliament would appear to offer little else. Even if a coalition government were formed quickly, the prospect of an extended period of a weak government implementing fudged legislation would become an unsettlingly realistic possibility.
However, a hung Parliament need not necessarily be bad for UK investors.
This is for a number of reasons, but firstly, and most importantly, it is because at the present time all of the three main political parties appear to recognise the seriousness of the UK's budgetary predicament.
Our own budget deficit is currently running at levels similar to those experienced in Greece. The consequences of Greece's previous fiscal imprudence are all too evident each day in the media. It must be very chastening for the public morale of the Greek nation to have deep cuts to public sector services and pay imposed on the country. As a result, there is little appetite for Greek-style political deals that would undermine fiscal discipline here.
This is crucial, and, indeed, in these circumstances, where all political parties are agreed on the need to take tough measures, there is even a slim possibility that a consensus emerges for shared legislation that is actually more prudent than would otherwise have been put forward by any single proponent.
So what are we to make of politicians suggesting that overseas investors could become sufficiently unsettled by a hung Parliament to threaten the UK's funding position – essentially raising the spectre of a re-run of the Greek tragedy?
This fear that we could go the way of Greece is nothing more than political device and should be ignored, at least in the short term.
It is important to realise that the UK is in a very different position to Greece, or indeed to Portugal, Spain, Ireland or Italy, the other great debtors.
Aside from any debate about our relative levels of aggregate debt, the health of our financial institutions or the tax-base of the economy (which would all show the UK in a good light), the UK has the additional advantage of a flexible exchange rate and a much less onerous debt maturity profile.
Both give the UK some time to deal with our problems, even if they must ultimately be robustly addressed.
This is not to say that it will be entirely “business as usual” if Parliament is hung. A period of negotiation is likely to be required to fashion credible financial plans that both address the deficit and support growth.
With the focus so strongly on the state of UK public finances, until such plans materialise, there is likely to be downward pressure on Sterling, possibly accompanied by an upward drift in government bond yields.
Importantly, however, in this scenario, investors in blue-chip UK equities should be relatively well-protected, since FTSE 100 companies now derive over two-thirds of their profits from overseas.
