2024 as 1974 revisited? UK political risk is being under-estimated

Edward Heath, Jeremy Thorpe, Harold Wilson: UK political party leaders in 1974

Since my youth I've been as interested in football as finance and politics. I measure my life in terms of World Cups and General Elections.

1974 marked the first year I became aware of both sport and political economy, and their respective effects on my feelings and finances. 

Harking back five decades is timely, not just because of the re-emergence of high, possibly double-digit, inflation in the UK in 2022, but also because aspects of the politics of the mid-1970s could return at the next UK General Election, most likely to be held in 2024, and the growing probability of this is not being factored into financial markets.

As of early April 2022, the Electoral Calculus site's translation of UK political opinion polls into parliamentary seats gives the Labour Party 303 seats, the Conservatives 257, the Scottish National Party 58, the Liberal Democrats 7.

Such an outcome, where it is impossible for the Conservatives to lead the Westminster government, is far likelier than most investors and bookmakers are currently pricing.

This is because the Conservatives must win at least 320 out of 650 seats to form a government. They will have no willing partners in a Coalition Government, other than a handful of Ulster Unionists, as happened after the 2017 General Election. The Liberal Democrats will not join a Conservative-led government, given their chastening experience after 2010. 

Conversely, even if Labour fall well short of the 326 seats required to form a majority on their own, their shared anti-Conservatism would form the basis of a potential 'arrangement' with the SNP to keep the Conservatives out of power.

Here's where things becoming exciting, interesting, sobering, worrying, depending on your political stance.

For so long as they are represented at Westminster over the next few years, it's difficult to imagine the SNP holding fewer than 50 seats. Given this, unless there is a large margin between the Labour and Conservative parties in England and Wales, it is very difficult for a UK-wide General Election to produce a stable, sustainable one-party majority government.

Three of the last four UK General Elections have produced a Coalition (2010), a minority government (2017), or a very small majority (2015).

Political uncertainty may be more structural in the UK than the exceptional outcome of the 2019 General Election has led many to believe. One thing financial markets dislike is political uncertainty as demonstrated by the relative weakness of the UK stock market from June 2016 until late 2019.

More speculatively, if a minority Labour government after 2024 requires not a full-blown coalition but rather a confidence and supply 'accommodation' with the SNP, and to some extent Liberal Democrats, then to shore up its precarious unity such an arrangement would unify for at least one parliamentary term around the following:

• A referendum on Scottish independence
• A reform of the electoral system, including boundary changes
• Votes for 16-17 year olds

If negotiating Britain's exit from the European Union was fraught, imagine how much longer and painful the separation of Scotland from the Union might be. 

Even if it didn't happen, the months, if not years, of uncertainty whilst the prospect of 'Scexit' was live would cloud the UK market's prospects.

Investment implications

Does this make the UK cheap for too many reasons, and potentially un-investable?

Not necessarily - the above scenarios might not happen, and even if they did, factors such as the likely fall in sterling would benefit many UK-listed stocks. That stated, I'm certainly a little sceptical when I hear UK fund managers describing the UK market as good value. It might well be cheap at first glance, but investors should always ask 'What is not being priced in?' when contemplating stock market valuations. 

My point is that the probability of a Labour-led UK government of some kind, particularly one likely to introduce constitutional reforms, let alone tax and regulatory policies inimical to financial markets, is far higher than both economic and political commentators realise.

As of early April 2022 the Electoral Calculus model gives a Labour majority a 39% chance and a Labour plurality a 26% chance. A Conservative majority is estimated at only 16% probability. It's hard to see the Conservative Party gaining popularity at a time of rapidly rising prices and taxes, and falling real living standards, between now and 2024.

So, if I get the opportunity to question any UK fund managers or company executives in 2022/23 I will be asking them to ponder the possibilities and prospects of a Labour-led government, if only to test if they're alive to its growing probability.

In 1974 there were two General Elections, followed by several years of political instability, notably over Scottish and Welsh devolution, and inflation peaking at over 20%. Just like Italy recently, England failed to qualify for two football World Cups in a row - 1974, and 1978. 

I'm not saying 2024-2028 will be an action replay of 1974-1978, but in both sport and political economy the possibilities of outcomes deemed unlikely but hugely consequential should be contemplated before not after they happen.