Hung parliament could cause stockmarket chaos

25 March 2010

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.

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