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Thursday, May 13, 2010

A United (?) Kingdom

So the Tories are back in power! And the Lib Dems are part of the coalition?

Whatever your political leanings, I think there is consensus that this is a strange alliance. And I think that this will have implications for the UK stock market.

For the sake of being bold, below is my hypothesis, please add your comments to it!

I predict that this coalition will last around two years and that we will see another UK election around summer of 2012. I think that David Cameron and Nick Clegg will actually personally get along, but they are closer aligned than their parties. So this points to a rather quick dissolution of the coalition. The reason I am giving them two years is that I think since both parties have been out of power for so long, they will not be eager to leave. But eventually, things will build up (I think it is likely that the Tories will not follow through on election reform) and the party base will get upset.

Second prediction is that this will be the new norm for the next several (maybe 4-6???) years. I think that the Lib Dems are on the rise and that Labour is on the way out. But, I'm not sure there will be a clean switch, instead I think this could be the start of some major three way action.

Why does any reader of this blog care? Normally I am pretty dismissive of the effect of so called "political turmoil" and its effects on the stock market (think about the big effect the Dems were suppose to have in 2006 or 2008), but I do think this UK election is significant since I really believe that there are now three viable parties in the UK. And this comes at a time when debt levels in UK are rising. I don't think any party will have the power (or the will) to make the tough decisions coming up... and I think the UK's economy will suffer.

Alex's Conclusion: Avoid too much exposure to the UK over the next several years!


  1. Political volatility is always an important thing to consider when deciding when to invest in a particular country.

    My most serious concern about investing in pound denominated assets over the next several years is that if the pound declines substantially, you'll be screwed. That's the technical term for forex exposure gone wrong. If the UK goes the way of Italy with coalitions collapsing and rising every other year, the pound will go the way of the Italian lira.

  2. Well, I'm not saying UK will be Italy bad... but the political environment does look like it won't be 35 years until the next hung parliament.