What will a hung parliament mean for you?
With no party having reached the magic number of 326 seats, Britain now has a hung parliament.
A hung parliament occurs when no single party has more than 50% of the seats in the House of Commons. In practice, this means it would be very difficult to get legislation through the house.
The Tories have claimed the most seats and David Cameron has made an offer for the Tories to work alongside the Liberal Democrats. However, it's likely to be some time before the exact shape the new government will take is agreed.
What does it mean?
So what will a hung parliament mean for the economy?
Patrick Connolly, spokesperson at financial advisers AWD Chase de Vere, says the General Election result is a potential disaster for the UK economy.
“There will be nobody with a clear mandate to make the tough decisions necessary to address the huge level of national debt,” he says.
“This means that it will be longer before any effective action can be implemented, by which time our economic position and level of debt could be significantly worse.
“This election is an opportunity missed for the UK and our economic problems are now likely to be even greater by the time they are dealt with. This will eventually mean even more spending cuts and greater tax rises.”
Effect on gilts
Gilts (government bonds) and sterling have already fallen sharply this morning as investors reacted to the election result.
The 10-year gilt has reversed some of its recent gains since trading began at 1am this morning, with the yield climbing 7 basis points to 3.86% by 6.30am.
Sterling has fallen significantly against the euro already this morning, down 1.54% to €1.156 and has dropped 0.85% against the dollar to $1.466. However, some pundits say the falls in sterling are short-term.
"There is a little weakness in sterling simply because the market was recently pricing in a government controlled by the Tories," says Thanos Papasavvas, head of currency at Investec Asset Management.
"It is not yet clear what the situation will be, which means sterling is likely to be a bit more volatile for the next few days, hopefully no longer than that.”
What will happen to UK equities?
Equities are also likely to fall sharply today – as much as a result of the Greek bail-out as the UK’s election result. This, together with the effect on gilts, could affect pension funds which invest in the stockmarket.
Simon James, founding partner at Gore Browne Investment Management, says: “UK equities should have a wide dispersion of returns across sectors. Defensives should outperform more cyclical names, and strong finances will be more important again. Pharmaceuticals, tobacco, food retailers, and telecoms should outperform. Overall, however, the London stockmarket is an international market, not just a local one, and thus UK equities will remain highly correlated with other major stockmarkets.”
The last hung parliament in the UK was in 1974 and led to hard times for savers and homebuyers. Back then, the FTSE All-Share Index – a broad measure of the stockmarket – fell nearly 15% in a month and ended the year more than 50% below where it began. However, the economic climate is very different today than it was then.
Andrew Fisher, chief executive of financial advisers Towry Law, says: “The economic and stockmarket conditions today are quite different from the four-day week of 36 years ago and so it is absurd to suppose that what happened then will be repeated now, simply because of an inconclusive election result.”
But the trouble is, markets hate uncertainty and if no one party has a workable majority then decision-making becomes difficult.
James says: “Uncertainty is bad for markets, and therefore bad for gilts and sterling. The more difficult it is to form a viable government, the more difficult it will be to return the UK to fiscal discipline.
“A further election, perhaps in the autumn, seems probable. This will allow continuing uncertainty. The parties will have to reconstruct their teams and their messages. This will take time - but they are already working on it.”
A falling FTSE
The FTSE 100 has already slumped by 1.3% to 5,193.05 this morning, to its lowest level since February. Banks led the falls, with shares in Royal Bank of Scotland falling 1.76p, or 5.72%, to 45.27p as the markets opened, after disappointing results. Lloyds and Barclays also dipped, falling 2.08p to 54.62p, and 12.05p to 289.65p, respectively.
One fear is that foreign investors lose confidence in sterling – as they did in 1974. If this happens, then the Bank of England might be forced to push up interest rates to defend the pound.
This means that borrowers who have been enjoying low-rate tracker or variable rate mortgages will see their payments increase. Another fear is that a hung parliament could significantly increase the risk of the UK losing its AAA credit rating.
A hung parliament could also result in tax increases all round as party pledges not to raise national insurance and income tax are at risk.
Mike Warburton, senior tax partner at accountants Grant Thornton, says: “Tax increases are inevitable, with the heavy lifting likely to come from income tax, national insurance and VAT.
“The political parties have given various pledges on this but, at the risk of being cynical, I wonder to what extent politicians will feel obliged to keep their manifesto commitments if they do not have an overall majority.”
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
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.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
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).