Hung parliament could cause stockmarket chaos
A hung parliament in the general election would be the worst possible outcome for the UK stockmarket, according to experts.
Standard & Poor's, Moody's and Fitch – the big three rating agencies – have said they will wait until after the election to review Britain's AAA rating but an inconclusive outcome would almost certainly have a damning effect.
However, Standard and Poor's has already put Britain's rating onto "outlook negative" and warned it would be watching closely to see if the new government comes up with a credible plan to tackle record levels of fiscal debt.
Britain has maintained an AAA rating since 1978, when it first started being rated. If that changes it would undermine the confidence of investors and businesses and affect the strength of sterling.
More practically, a downgrade effectively means the agencies are unsure of Britain's ability to pay back its debts and that would affect the country's ability to borrow.
With latest polls from YouGov and Populus showing neither of the main parties have a decisive lead, investors will get increasingly jittery in the run up to election day.
"If there is a hung parliament, with no party gaining a majority of seats, the biggest impact will probably be on fixed interest and gilts, especially in terms of ratings," says Ben Yearsley, investment manager at Hargreaves Lansdown.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, says: "The bond markets and credit rating agencies will be looking for a credible medium-term fiscal consolidation plan to be announced soon after the election."
If Britain is downgraded to AA – the current rating of Ireland, Japan and Spain – it is likely overseas investors will pull out of the country, as sterling continues to decline.
"Equity investors will wait a little longer to see what may occur but if sterling remains weak then the selling of equities by overseas investors is a real possibility," says Julian Chillingworth, chief investment officer at Rathbone Investment Management.
To pre-empt the upcoming uncertainty, Chillingworth suggests more sophisticated investors switch their assets out of sterling. "The less sophisticated should buy those funds and companies with substantial businesses outside the UK," he concludes.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).