Heading to the polls

On 12 December, Britons will head to the polls to decide who will form the next government in the UK. Voters in 650 constituencies across the UK will elect representatives to the House of Commons, the lower chamber of the UK’s law-making body. The candidate with the highest number of votes in each constituency wins the seat, regardless whether he or she gets a majority.

326 will be the magic number to look out for on Thursday. The party which clinches 326 seats in the lower chamber will get an opportunity to form a ruling government – with the Queen’s blessing of course. If no party wins an outright majority, then it will be a time of backdoor negotiations and difficult compromises, all in the name of forming a ruling coalition.

Boris Johnson is hell bent on avoiding the latter scenario. His predecessor, the now unburdened Mrs Theresa May, squandered away her party’s majority by calling for snap elections in 2017 which led to the formation of a coalition government that has failed time and again to deliver Brexit. To be fair to Mrs May, Mr Johnson was no less unsuccessful, having compromised the Tory party’s political position by expelling over 20 members for voting against him.

Easy, breezy victory?

Mr Johnson needs to deliver Brexit. He has a plan. All he needs is the votes. And indeed, he has plenty of reasons to smile given that the path to Brexit seems somewhat clearer, for now.

For one, all the Tory candidates up for election have already pledged to support his deal. If successful on 12 December, Mr Johnson will not face the type of internal dissension he did in October when he called for a vote on his Brexit deal.

Surprisingly as well, Chief Brexiteer Nigel Farage – the leader of the Brexit Party and once a critic of his Brexit deal - has also blessed Mr Johnson’s deal after performing some political calculus. The math is simple: it’s better to Brexit than not Brexit at all. He decided that the best chance at Brexit would be to ensure a Tory majority in the House of Commons and that he could play his part by stepping aside from competing for the same seats as the Tory party. This seemingly clears the way for an easy breezy victory, Mr Johnson would hope.

After all, the polls are on his side. The conservative Tory party started out in the lead and has kept that position throughout their campaign. Unlike his predecessor, Mr Johnson is an effective campaigner. Don’t let his unkempt demeanour and seemingly brash persona fool you. It’s political theatre at its best and it all works to be relatable to the layman and bring in the votes.

It also helps that Mr Johnson is facing off against an opponent who is even less well liked by the voters than he is, namely Mr Jeremy Corbyn, the chief of the Labour party. Like the US in 2016, Britons are faced with the choice of two very unpopular candidates. It’s a choice between bad and worse. Depending on the person you ask, you would probably get a different answer on who is which.

Based on a YouGov survey, an overwhelming 61% of people interviewed have a negative opinion of Mr Corbyn, while the proportion is only slightly smaller in the case of Mr Johnson where 47% of people interviewed harboured ill views.

Enough, let’s move on

Yet this election might be less a contest of personalities and more a battle for who controls the Brexit narrative. After all, the Ipsos Mori Issues index for October shows that Brexit remains the main issue of concern for the UK electorate.

The prevailing public sentiment is one of impatience. The parliamentary impasse on this issue has persisted long enough. The House of Commons must make a decision on Brexit. Wherever they stand on this issue, this election presents an opportunity for the public to secure their choice. Indeed, Brexit is seen as a distraction that prevents the government from addressing more fundamental issues affecting the lives of ordinary citizens. Other domestic policy matters like healthcare, security and environmental protection are also among top concerns of the UK citizenry. Ending the Brexit uncertainty could free up the agenda to address these more pressing domestic concerns. We’ve watched enough YouTube clips to realise that the public’s patience is wearing thin.

As it turns out, Boris Johnson’s negotiated Brexit plan is the most expedient way to escape the current predicament. It’s little wonder that predictive election models point to an outright Tory victory at the polls on Thursday, which would allow Mr Johnson to end the Brexit impasse and leave the European Union very quickly.

According to Electoral Calculus, an election prediction website, there is a 70% probability of a Conservative majority in the House of Commons. Meanwhile, the YouGov’s multi-level regression and post-stratification (MRP) model, which accurately predicted a hung parliament in 2017, estimates that the Tory Party could sweep the polls and win 359 seats, a sizable majority that would give Mr Johnson the mandate he needs to deliver a quick Brexit and effect a conservative agenda.

All polls point to a Conservative majority

Markets seem convinced that the polls are right, that indeed the Conservative party will emerge victorious in the elections this week.

The Sterling has gained more than 9% against the US Dollar from its recent low in August, pricing in diminishing Brexit uncertainty on two factors, first being the hasty completion of Mr Johnson’s Brexit agreement and the second being the increased chances of a Conservative majority in the House of Commons after the elections this week.

Indeed, the Pound had whipsawed on the back of poll results, rising against the greenback when polls show a firm Conservative lead and weakening when the reverse happened.

One would think that the Pound should strengthen on news that the party willing to overturn the Brexit referendum was rising in the polls, on account that the UK’s economic future would be a lot brighter if it stayed within the free trade union. Yet, as it stands, the Pound has priced in the fact that Brexit is an irreversible reality and the currency is further propped up by factors that could deliver Brexit quickly and with certainty. The agent for this change is the Tory party and as polls have it, a parliamentary majority might be within reach.

Polls can be misleading

While polls offer useful information, they are far from gospel. In fact, over time polls may capture noise, more than signal, especially as party loyalties have become more volatile and fluid over time. Traditional polling techniques through phone calls and on-the-street interviews have become less effective in the age of technology and relentless information bombardment. Also, polling popularity on a national scale need not translate into seats won on a local level. In fact, local voting intentions can have outsized impact on the composition of the House of Commons. Conversely, this could also mean that just a small edge in popularity can lead to large advantage in terms of number of seats won.

Others would point to the “Bradley effect” as a reason for not trusting polls. Originally, this was based on the public’s reluctance to admit that they would not vote for an African-American candidate (Tom Bradley) as California’s governor in 1982. More generally, the term describes the case where voters are reluctant to reveal their true preferences to pollsters on account that they do not want to be associated with certain negative values espoused by a political campaign despite favouring the campaign’s policy positions.

Take the Labour Party as an example. Jeremy Corbyn has fielded a flood of criticisms for being anti-semitic and tolerating anti-semitism in his party. Yet the Labour Party’s socialist bearings and populist policies are widely popular. A supporter may like their policies but may not necessarily want to be associated with the party’s questionable moral standing. They may not want to profess support of the labour party to a pollster because they would like to uphold a righteous moral image. But in the private space of an enclosed balloting booth, their economic policy preferences take precedence over moral authority, leading them to vote for the Labour party anyway.

Nevertheless, despite all the reasons for not trusting polls, we should not ignore them altogether. Neither should we put all our eggs in one polling basket. A more measured reading of the polls would tell us that the contest between the Labour and Tory party is a close one. The Tory party may not have this in the bag much as people would like to believe it so.

Election outcomes in perspective

The most benign outcome would be a Conservative majority in the House of Commons. Their business-friendly policies ensure little disruption to the status quo whilst their Brexit plan removes the uncertainty of a no-deal Brexit.

What about a Labour victory? On the Brexit front, the Labour party might seek to renegotiate a soft Brexit which secures access to the single market or may even call for a second referendum to potentially overturn Brexit. The advantages of a soft Brexit position are heavily outweighed by a deeply anti-business agenda, including the nationalisation of key utilities like rail, mail, water and energy production as well as higher taxes for top 5% earners and multinational corporations.

Given the trade off, the market would much rather deal with an orderly Brexit with some changes around the edges as opposed to a soft Brexit accompanied by radical economic policies.

Putting Brexit to rest, for now

Whatever the outcome of the upcoming election, the likelihood of a disruptive no-deal Brexit has diminished markedly. This will likely cap the downside risk for UK risk assets and the Sterling.

With a no-deal Brexit likely out of the picture, attention will inevitably shift to trade negotiations between the UK and the European Union. This is when the real work begins. The timeline is tight and Mr Johnson’s Brexit plan leaves little in the way of a trading safety net should talks breakdown. Indeed, with Mr Johnson’s Brexit deal, the UK is merely trading one sort of uncertainty for another. Which sort of uncertainty is worse? We will find out next year.

In any case, whatever the outcome of the election, 2020 will likely herald a year of policy stimulus for the UK. First, both parties have pledged their support to loosen the purse strings and increase government spending. In particular, the Tory party supports loosening fiscal rules to finance infrastructure investments as well as allocating more funding for healthcare expenditure, which includes building new hospitals. Second, the Bank of England has communicated a slightly more dovish posture following a softening of the economy. More stimulus could come by way of the monetary policy channel. This would be greatly welcome given the slowing economy with both manufacturing and services Purchasing Managers’ Indices (PMIs) slumped in contractionary territory.

Ultimately, Brexit uncertainty will persist until the UK finalises a new trading relationship with the European Union.

The hope is that the election on 12 December would end the political impasse in the House of Commons and significantly reduce political uncertainty where Brexit is concerned. Whether or not the Tory party prevails, we can mostly rule out a no-deal Brexit. That would mean one less risk event to deal with.

Indeed, in an environment where major problems have continued to persist, it’s nice to think that an issue as big as Brexit could see some closure in 2019 – well, at least until concerns during trade negotiations bubble to the surface again. Sounds familiar?