Uncertainty is feared by investment markets. More uncertainty means more price volatility as investors react to short-term news and shifting expectations. The forthcoming general election is one of the most unpredictable in the country's history, as smaller parties capitalise on voter disenchantment with the mainstream parties. The potential political stalemate after the voting also has implications for charity investors.
In the short term, political uncertainty is likely to lead to a pause in business investment, which might also cause a slow-down in employment growth. Specific companies and sectors are already being affected as investors worry about the implications of potential new government policies. For example, energy providers are concerned about a Labour government because the party has pledged to cut home energy bills. And banks are not looking forward to an increase in the annual levy to fund public spending. Meanwhile, companies that trade with Europe are concerned about the prospects of a referendum on EU membership should the Conservatives win. This is already affecting foreign investment in the UK, because companies want access to the entire European market.
However, the polls suggest that the election result is unlikely to be clear-cut, and that a coalition or minority government is a big possibility. Although all three of the main parties agree that more austerity is required after the election, they disagree on the scale, timing and mix of policy in terms of spending cuts and tax increases. A coalition government makes austerity harder to implement. This could boost near-term economic growth compared with a scenario in which even tougher austerity measures are implemented. Over the medium term, however, a delay in austerity might slow the reduction in the budget deficit, leaving the UK vulnerable if the global economy slows down.
On the face of it, then, the election adds more uncertainty and not much prospect for positive market surprise, whatever the result. A Conservative majority, looking unlikely at the moment, would heighten worries about continuing membership of the European Union, and would be likely to have a negative effect on investment and financial markets. A Labour majority, also unlikely on current polling, is likely to be taken negatively by the financial markets because of perceived anti-business policies. A coalition government, of course, would find it difficult to agree on economic and budgetary policies, thus prolonging the uncertainty.
For charities, austerity spells further reductions in public spending for the sector, which would put unwanted pressure on sector finances. The squeeze on funding is clearly a concern, and the volatility of the investment markets will only heighten anxiety for charity investors. Political, constitutional and economic uncertainty is also likely to have a negative impact on our currency, so sterling weakness could be a new trend. Uncertainty, it seems, is the only thing we can be sure of, and it means the next few months might not be plain sailing for charity investors.
Kate Rogers is client director at Cazenove Charities