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INVESTMENT INSIGHTS ARCHIVE
Originally posted in April 2015
ELECTION INSIGHTS - ‘NO, NO, NO….’
By Ben Davies
My stepdaughter, Helena, recently embarked on a post-University boondoggle (sorry I mean a journey to explore wider cultures), which reminded me of my own travelling adventures. Twenty-five years ago I was on a flight to Australia, via Thailand, on an eight month around the world trip, when the Pilot made an unusual announcement. With typical British aplomb, he declared that we would be taking a precautionary detour over the USSR, as we still referred to Russia back then. Apparently, a skirmish had erupted in the Middle East. Of course, it was the first Gulf War.
The period of the first Gulf War coincided with the acrimonious Tory leadership election in November 1990, when Michael Heseltine stood against Margaret Thatcher, the incumbent leader and Prime Minister of the UK since 1979. Thatcher had been seen as increasingly autocratic and unpopular with the electorate. Although residing over an astounding economic revival, primarily brought about by privatisation and promotion of more free market ideals, the economy and inflation grew too hot and so interest rates were raised to 15%. Throw in the unpopular poll tax riot, an internal insurrection and her days were numbered.
Thatcher didn't win the first leadership ballot outright and after being told that she had lost the confidence of her party, she agreed not to stand in the second ballot. John Major ultimately became the leader and with it, Prime Minister. Significantly, it was less the economy than the question of the UK's relationship with the European Economic Community that sowed the internal seeds for her demise.
Sir Geoffrey Howe, the then Foreign Secretary, and Chancellor Nigel Lawson wanted her to join the ERM, a move she was adamantly opposed to. It had been her infamous Bruges speech that had deepened the rift with these two members of her cabinet. So disgruntled were these men, they forged an alliance to undermine her at a later date.
Earlier in 1988 Jacques Delors, the EC commissioner, had addressed the Congress of the British Trade Union, promising that the EC would be forced to require nation states to pursue pro-labour legislation. Margaret Thatcher, the British Prime Minister, reposted with a brilliant polemic – 'The Bruges Speech', as it came to be known, at the College of Europe in Bruges, Belgium.
In it she said: "To try to suppress nationhood and concentrate power at the centre of a European conglomerate would be highly damaging and would jeopardise the objectives we seek to achieve.
"We have not successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level with a European super-state exercising a new dominance from Brussels."
She wasn't anti-European, far from it. She championed the European Single Market and even accepted more 'Qualified Majority Voting', instead of the principle of unanimity, because she did not want individual countries to block the market that ultimately believed fostered the best chance of implementing the four freedoms at that time. What she was opposed to was federalism and in October 1990, just prior to her loss of power, she spoke before parliament about a European Council meeting held in Rome, which she had attended, saying:
"The President of the Commission, Mr. Delors, said at a press conference the other day that he wanted the European Parliament to be the democratic body of the Community, he wanted the Commission to be the Executive and he wanted the Council of Ministers to be the Senate. No. No. No."
Howe resigned as Deputy Prime Minister the next day, in defiance of her continued stance on Europe, setting in motion the leadership challenge. In the Overview I mentioned that Cameron had also stood up to EU legislation in December 2011, except this time it was the Euro scepticism of 81 Tory rebels that had provoked him into action. The difference this time was that Cameron's stance had quelled any chance of a leadership challenge. Cameron, like Thatcher, is pro-Europe, and as we know, went on to offer the country an In/out referendum on Europe in light of any reforms negotiated. The similarities between Cameron and Thatcher's stance have ironically had different outcomes. Both were pro-Europe with a strong stance against EU interference, but one was backed by his party as many of them were Euro sceptics, whilst the other was unceremoniously dumped, as they saw their leader as less pro-European integration than themselves.
I personally hope Cameron wins the election and his referendum vote has as much significance as it did for the Labour-led Minority government of 1974, run by Harold Wilson. Back then Wilson had promised renegotiation of the UK's terms of membership, to be followed by a consultative referendum on continued membership under the new terms, if they were acceptable. It ultimately changed to the promise that Labour would "give the British people the final say, which will be binding on the Government – through the ballot box – on whether we accept the terms and stay in or reject the terms and come out." (Wilson 1974). Two thirds of the country voted to stay in the European Community and Wilson, who was a 'Yes' campaigner, fortified his position in power.
It's quite possible we will witness a Minority government again as the polling is getting really tight, but there are some extraordinary peculiarities and biases within our voting system that make interpretations of the polls extremely difficult. We have broached this topic before. I must say I, would rather guess who the pyromaniac was at an all-night candle vigil, than predict this election outcome.
2015 Polls Constituent Seats / Vote Share
Looking at the collective polls, it is clear that public opinion is divided in the same way it was over the question of who did best in the two leader interviews with Paxman and the audience. If it was already a close run thing, it is even more so after this event. The shortened Easter week has seen Labour come back in the polls with a 1 point lead:
CON 33%(-1), LAB 34%(nc), LDEM 8.3%(+1), UKIP 14.1%(+1), GRN 5%(nc)
You will know there are 650 seats in the House of Commons. A party needs to win more than half to form a majority government. Based on the above poll, this isn't going to happen. But it's hard to compute the seats that will be gained or lost by looking at the % share of the party votes. Luckily, the New Statesmen has launched a special election site called May2015.com that worked out the maths by linking constituency majorities and overall vote share, so one can see exactly how different levels of support are likely to translate into seats. If you are at all curious about the election, it's a great tool to look at a wealth of historic polling data, as well as place your own poll predictions in. Their tool "drilldown" gets under the bonnet of all the data the polls bring in, and goes beyond the headline % vote. In ‘Views’ I showed you who is considered the 'Best on Europe'. Here is the link to Drilldown – I recommend you go look at other policy areas yourselves.
No poll is 100% accurate. Pollsters claim that, a poll of 1,000 people will generally be accurate within a margin of error of +/-3%. So let's swing the % votes by 2% up for the Conservatives and 2% down for Labour. A 35% (from 33%) Conservative vote share increases Tory seats by 14 from 267 to 281 and a 32% Labour share (from 34%) decreases their seats by 14, from 277 to 263. I can fiddle with these %'s all day long, but as you will no doubt have realised, if both parties have an equal % of votes, they will not have the same number of seats. This is ultimately due to these electoral biases I keep mentioning.
The polls imply that each of the major parties has 230 'safe' seats, but what we want to follow are the marginal seats, where it's a toss-up as to who wins. The Lord Ashcroft polls track them and it is these seats that will decide the election. The First Past the Post (FPTP) voting system ensures that a candidate wins if they get only 1 more vote in a constituency than their second place rival, so the marginal (or swing seats as they are known) can have a major impact.
The UK electoral bias creates a great deal of the complexity in seat calculation. For example, the Conservatives would need a lead of 11 percentage points over Labour to win an overall majority, while the Labour party only needs a lead of 3 percentage points to achieve a majority win. The last two general election results are equally illustrative. In 2005, Labour had a lead of 3 points over the Conservatives and got a majority of over 60 seats; in 2010 the Conservatives had a lead of 7 points over Labour, but did not have an overall majority at all. Another really stark example of the bias is a favourite from the 2010 election. The Lib Dems secured 23% of the votes, only 6% less than Labour, but received 201 less seats, which is why they exacted an alternative vote referendum out of the Tories, in exchange for supporting the Conservatives in the coalition government, formed in 2010. I would say the public debate about the referendum was one of the most ill-informed I’ve seen, so not surprisingly AV wasn't voted in. All in all, these biases appear rather unfair. The Institute of Opinion and UKpollingreport.co.uk provide good analysis on this subject.
As it stands in the above polls, Labour would have 277 seats and Conservatives 267. Cameron will be offered the right to form a government first, as there is no outright winner. If the Lib Dems lose half their seats and the SNP win as many seats in Scotland as the polls suggest, it is likely that Cameron won't be able to forge a new government. Do the maths, the Tories will not run a government based on the above.
Labour won 41 of the 59 seats in Scotland in 2010, but the 2015 polls imply the SNP will win 54 seats with 46% off the votes, at the expense of Scottish Labour. Miliband's ham-fisted efforts during the Scottish referendum were no doubt the catalyst for this radical shift in voter sentiment. So, ironically, Miliband's balls-up may lose him the ability to have a majority, but it is also likely to prevent the Conservatives from forming a Minority government (as the polls stand)
A Labour, SNP and Lib Dem alliance looks on the cards, except it would not be acceptable for the SNP to receive any ministerial positions, as they have been campaigning to split the UK. Essentially, these smaller parties would agree to a confidence and supply arrangement where they don't bring down the main party with any 'no' confidence votes, and 'supply' them with votes on bills to pass budget legislation and the like.
If the poll swings by the 3% I suggested here, then the Conservatives could only form a coalition government. They would need around 36.1% of the vote share at 301 seats and the Lib Dems to get 25 seats, as Sinn Fein would abstain on their seats and the DUP would probably come in with the Tories. The EU referendum may be lost if the Lib Dems stipulate this as the terms for a hook up with the Tories. This is more of an issue for Cameron internally, than externally, as he stated a majority win would see a referendum. His backbenchers, the 81 rebels could then test his resolve on Europe.
The 1992 election that Thatcher was never to stand for, after her internal cabinet struggle, showed that the Labour leader Neil Kinnock was going to win the next election, possibly with some help in a Labour-Lib Dem government. But at the last hour, the votes swung by over 6 percentage points relative to the polls to give Sir John Major a premiership elected by the people.
Why had the polls been so wrong? Add in the +/- 3% and then the reality of the poll biases were to Labour, having not been adjusted, like the electoral biases mentioned above, to social change and where people lived over that time. Most importantly though, the swing voters plumped to vote for the Tories. They were known as the 'Shy Tories', those who perhaps felt they had to align with liberal attitudes towards public spending, welfare and immigration, but chose Tory for their relative economic know-how (and, of course, because of the infamous spitting image puppets of the Labour leaders).
They held their voter beliefs to themselves for fear of isolation from their social group. This 'spiral of silence' is a theory courtesy of Elizabeth Noelle-Neumann, a German political scientist. This theory was the principle explanation behind the 1979 election win for Thatcher, when the working classes silently voted for change. This was still a period of union power and working man clubs, despite the 'Winter of Discontent', and it took a grocer's daughter to enable this socio-economic group to finally vote Tory.
Cameron needs the 'the spiral of silence' to be broken on Election Day. Come on voters, don't be shy, admit the economy matters. The Tories have deliver better policy than Labour and will in the future. Now there are many issues I have with the UK government over the economy, but for me the Tories have a sensible tax regime and promote ingenuity through the private sector. Labour do not. It's that simple. So 'No, No, No' to Labour.
On account of diving into the nerdy and murky world of electoral engineering, I neglected to spend more time on the investment outcomes, perhaps where I have more expertise. But these graphs below make it pretty clear what the seasonality of the FTSE 100 and sterling is during election years and, for comparison, non-election years.
Exclude 1987 and one should sell before May and then buy in August. The question we should ask, is 2015 more like 1987? Well, we will know soon enough. Our FTSE 100 Trend indicator is whirring up for a trend move. We will keep you informed, which way it will trend we are less certain of as yet.
FTSE Returns by Incumbent Party
Sterling in election years tends to rebound after June and then fall again in September of the same year. This year sterling has fallen faster than in previous election years on average. It seems the currency takes the brunt of the volatility over election years, which makes more sense, as the FTSE 100 is not driven by domestic issues to the same extent. Other factors to consider are interest rate movements on the currency or the behaviour of other currency movements, but this is an average nonetheless
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