CIO Flash
Preview U.K. general election – Into the unknown
May 5, 2015
+++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH +++ CIO FLASH
Current situation
— The United Kingdom will hold a general election on May 7. According to current opinion polls, neither the Conservatives nor Labour is
likely to be able to command an absolute majority of the House of Common’s 650 seats. In that case they will have to attempt to form a
minority government, or engineer a coalition arrangement (formal or informal) with some of the minor parties.
— The Conservatives look on course to emerge from the election with the largest number of seats (perhaps 270-280) and could then try to
govern on its own. Their ability to attract support from other parties may be limited. The Liberal Democrats, the Conservatives’ current
coalition partner, look set to lose a large number of seats and also appear deeply split on who to support. Other potential partners might
be the Democratic Unionists (Northern Ireland) and UKIP but these would be difficult bedfellows.
— Labour currently looks set to gain around 260-270 seats. These, combined with the c. 55 seats expected to be won by the Scottish
National Party (SNP), some Liberal Democrat and other minor party support, might result in a total seat tally above the 326 needed for a
majority. But Labour has ruled out a “deal or coalition” with the SNP if it was needed to form a Labour-led government. This commitment
may be designed to bolster Labour’s support in Scotland, or reassure English voters, or to prepare the ground for an attempt at a
minority Labour government (which the SNP, even if it did not formally support it, might be reluctant to stop).
— While the prospect of a much more fragmented party lands cape and the unproven process of coalition-building leaves markets in a
period of uncertainty, the highest degree of prolonged uncertainty might stem from a majority win of the Conservatives. In that case they
would have to stick to their promise to hold a referendum about Britain’s membership in the EU by end-2017. The prospect of this
referendum – as the British electorate’s appetite for a “Brexit” is unclear – might be negative for markets.
Timeline
— Election results will be released, seat by seat, during the night of May 7/8. Formal negotiations can then start between the parties.
These took six days after the 2010 election. On May 18, parliament reassembles. On May 27, the Queen reads out a summary of the
the new government’s proposed agenda (the Queen’s speech). By then, either the Conservatives or Labour will need to have convinced
the Queen that they can create a viable government. In early June the House of Commons will vote on the Queen’s speech. If the new
government loses this vote, it will not automatically trigger an attempt to form a new government. But the credibility of the new
government would be badly damaged and a vote of confidence could follow soon after.
Investment implications
— It is important to distinguish between three factors:
—
Uncertainty over the composition/stability of the next government. Coalition negotiations could take several weeks and, under a
worst-case scenario, it may not be evident whether the United Kingdom has a viable government until early June or even longer.
Markets might be assumed initially to react negatively to such uncertainty. One question is whether, if the uncertainty is
prolonged, markets start to accept it as the “new normal”, and start focusing on other issues.
—
Policy differences between the two parties. To over-simplify: a Conservative government would be fiscally tighter, particularly in
the early years of the parliament; a Labour government would be more likely to impose extra regulation on certain areas of the
economy. The SNP, it if exerts any influence on policy, would want to be fiscally-expansionary.
—
Longer-term concerns over a “Brexit” referendum. The Conservatives have promised to hold a “Brexit” referendum by end-2017.
This commitment looks very likely to be honoured, but might just be abandoned as part of coalition negotiations. A Labour or
Labour-led government would not hold a “Brexit” referendum. The prospect of this referendum – even in the absence of
evidence that the British electorate would vote for a “Brexit” – might be negative for markets.
— Fixed income: Uncertainty could cheapen U.K. Gilts vs. U.S. Treasuries – but they might still have some appeal, particularly given the
outlook for German Bunds. One question is to what extent looser fiscal policy under a Labour or Labour-led government might
encourage the Bank of England (BoE) to raise rates earlier. (But the reverse is also possible: if a Labour government led to a decline in
confidence and thus slower growth, then a BoE rate-rise decision would likely be pushed back.)
— Equities: The U.K. market has underperformed the rest of Europe year-to-date, due in part to the positive impact of European Central
Bank (ECB) quantitative easing (QE) on Eurozone markets. In our view macro fundamentals of U.K. equities are largely defined by the
global economy and less so by the domestic economy or politics. Therefore, the election impact is likely to be temporary for many large
caps and limited to a few sectors like utilities (fear of increased regulation) or defense (lower spending) in case of a Labour-led
government. Only a prolonged period with no government formation at all could cause ongoing underperformance of U.K. equities. Any
Eurozone turmoil could move money back into the market. In recent years of financial crisis U.K. equities have outperformed the
Eurozone.
— FX: In general, the pound sterling is likely to continue to struggle against this background. Only a clear majority for one of the "big"
parties, preventing longer lasting coalition negotiations or even new elections, would strengthen Sterling in the weeks ahead.
Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk, possible
delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and
you may not recover the amount originally invested at any point in time.
Deutsche AWM expectations 2015. Forecasts are based on assumptions, estimates, opinions and hypothetical models or
analysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved;
Deutsche AWM Investment GmbH, CIO Office; Deutsche Bank AG CIO Flash – Preview U.K. general election – Into the unknown – May 5, 2015.
Glossary
Explanation of terms
Bank of England - The Bank of England (BoE) is the central bank of England.
Brexit - Brexit is a combination of the words "Britain" and "Exit" and describes the possible exit of the United
Kingdom of the European Union.
Conservative Party - The Conservative party is a centre-right political party in the United Kingdom.
Democratic Unionist Party (DUP) - The Democratic Unionist Party (DUP) is a unionist party in Northern Ireland.
European Central Bank (ECB) - The European Central Bank (ECB) is the central bank for the euro. It
administers the monetary policy of the Eurozone, which consists of 19 European Union member states.
Eurozone - The Eurozone is formed of 19 European Union member states that have adopted the euro as their
common currency and sole legal tender.
Gilts - Gilts are bonds that are issued by the British Government.
House of Commons - The House of Commons is the lower house of the parliament of Britain. It includes
representatives from England, Northern Ireland, Scotland, and Wales.
Labour Party - The Labour Party is a centre-left political party in the United Kingdom.
Liberal Democrats - The Liberal Democrats are a centrist, social liberal political party in the United Kingdom.
Minority Government - A minority government is a cabinet formed in a parliamentary system when a political
party or coalition of parties does not have a majority of overall seats in the parliament.
Quantitative easing (QE) - Quantitative easing (QE) refers to broad-based asset-purchase programs conducted
by central banks; these assets can be government bonds, but also other assets like asset-backed securities.
Scottish National Party (SNP) - The Scottish National Party (SNP) is a nationalist and social-democratic
political party in Scotland.
Sterling - The sterling, also known as the pound sterling, is the official currency of the United Kingdom.
Treasuries - Treasuries are fixed-interest U.S. government debt securities with different maturities. Treasury
bills, also T-bills, mature in one year or less. Treasury notes, also T-notes, mature in two to ten years. Treasury
Bonds, also T-Bonds, mature in twenty to thirty years.
UK Independence Party (UKIP) - The UK Independence Party, commonly known as UKIP, is a eurosceptic and
right-wing populist political party in the United Kingdom.
CIO Flash – Preview U.K. general election – Into the unknown – May 5, 2015.
Important Information
In the UK this publication is considered a financial promotion and is approved by DB AG on behalf of all the
entities trading as Deutsche Asset & Wealth Management in the UK.
Deutsche Asset & Wealth Management represents the asset management and wealth management activities
conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche Asset & Wealth
Management products or services by one or more legal entities that will be identified to clients pursuant to the
contracts, agreements, offering materials or other documentation relevant to such products or services. Deutsche
Asset & Wealth Management offers wealth management solutions for wealthy individuals, their families and
select institutions worldwide. Deutsche Asset & Wealth Management, through Deutsche Bank AG, its affiliated
companies and its officers and employees (collectively “Deutsche Bank”) are communicating this document in
good faith and on the following basis.
This document has been prepared without consideration of the investment needs, objectives or financial
circumstances of any investor. Before making an investment decision, investors need to consider, with or without
the assistance of an investment adviser, whether the investments and strategies described or provided by
Deutsche Bank, are appropriate, in light of their particular investment needs, objectives and financial
circumstances. Furthermore, this document is for information/discussion purposes only and does not and is not
intended to constitute an offer, recommendation or solicitation to conclude a transaction or the basis for any
contract to purchase or sell any security, or other instrument, or for Deutsche Bank to enter into or arrange any
type of transaction as a consequence of any information contained herein and should not be treated as giving
investment advice. Deutsche Bank does not give tax or legal advice. Investors should seek advice from their own
tax experts and lawyers, in considering investments and strategies suggested by Deutsche Bank. Investments
with Deutsche Bank are not guaranteed, unless specified. Although information in this document has been
obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it
should not be relied upon as such. All opinions and estimates herein, including forecast returns, reflect our
judgment on the date of this report, are subject to change without notice and involve a number of assumptions
which may not prove valid.
Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk,
possible delays in repayment and loss of income and principal invested. The value of investments can fall as well
as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial
fluctuations of the value of the investment are possible even over short periods of time. Further, investment in
international markets can be affected by a host of factors, including political or social conditions, diplomatic
relations, limitations or removal of funds or assets or imposition of (or change in) exchange control or tax
regulations in such markets. Additionally, investments denominated in an alternative currency will be subject to
currency risk, changes in exchange rates which may have an adverse effect on the value, price or income of the
investment. This document does not identify all the risks (direct and indirect) or other considerations which might
be material to you when entering into a transaction. The terms of an investment may be exclusively subject to the
detailed provisions, including risk considerations, contained in the Offering Documents. When making an
investment decision, you should rely on the final documentation relating to the investment and not the summary
contained in this document.
CIO Flash – Preview U.K. general election – Into the unknown – May 5, 2015.
Important Information (continued)
This publication contains forward looking statements. Forward looking statements include, but are not limited to
assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward
looking statements expressed constitute the author’s judgment as of the date of this material. Forward looking
statements involve significant elements of subjective judgments and analyses and changes thereto and/or
consideration of different or additional factors could have a material impact on the results indicated. Therefore,
actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is
made by Deutsche Bank as to the reasonableness or completeness of such forward looking statements or to any
other financial information contained herein. We assume no responsibility to advise the recipients of this
document with regard to changes in our views.
This document was not produced, reviewed or edited by any research department within Deutsche Bank and is
not investment research. Therefore, laws and regulations relating to investment research do not apply to it. Any
opinions expressed herein may differ from the opinions expressed by other Deutsche Bank departments including
research departments.
No assurance can be given that any investment described herein would yield favorable investment results or that
the investment objectives will be achieved. In general, the securities and financial instruments presented herein
are not insured by the Federal Deposit Insurance Corporation („FDIC“), and are not guaranteed by or obligations
of Deutsche Bank AG or its affiliates. We or our affiliates or persons associated with us may act upon or use
material in this report prior to publication. DB may engage in transactions in a manner inconsistent with the views
discussed herein. Opinions expressed herein may differ from the opinions expressed by departments or other
divisions or affiliates of Deutsche Bank. This document may not be reproduced or circulated without our written
authority. The manner of circulation and distribution of this document may be restricted by law or regulation in
certain countries. This document is not directed to, or intended for distribution to or use by, any person or entity
who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United
States, where such distribution, publication, availability or use would be contrary to law or regulation or which
would subject Deutsche Bank to any registration or licensing requirement within such jurisdiction not currently
met within such jurisdiction. Persons into whose possession this document may come are required to inform
themselves of, and to observe, such restrictions.
Past performance is no guarantee of future results; nothing contained herein shall constitute any representation
or warranty as to future performance. Further information is available upon investor‘s request. This document
contains information not intended solely for the recipients. The information has been considered in investment
decisions of our asset management division. All third party data (such as MSCI, S&P & Bloomberg) are
copyrighted by and proprietary to the provider.
CIO Flash – Preview U.K. general election – Into the unknown – May 5, 2015.