How to play the general election

The nation will be going to the polling stations today to cast their votes in what is set to become the closest general election in years.

As of 4 May, just two days before the election, the Conservatives on 35% held a seven-point lead over Labour and the Liberal Democrats, who were both trailing on 28%. The bookies were narrowly backing a hung parliament at 5/6 with an overall Tory majority second at evens.

Interestingly, back-testing of the accuracy of these polls reveals that they tend to overstate Labour support while providing an accurate snapshot of Conservative and Lib Dem support.

Stephen Lewis, an economist at Monument Securities, points to the 2005 election. Here the average score
from the six leading polling organisations had Labour on 37.7%, whereas on the day they only received 35.3% of the vote. The Tories managed a 32.3% share after the polls had them on 32.2% and the Lib Dems 22.1% against a 22.8% projection.

‘It would be unwise to assume that the polls are underestimating the extent of Conservative support, though they may still be overestimating Labour support,’ he says.

If the polls ring true this time around, the Tories would be around 45 seats short of an overall majority. So what outcomes are investors looking for and how should they position their portfolios to reflect this?

Here we look at what might happen in the markets.

A hung parliament

The prospect of a hung parliament is almost as divisive as the policies of the three main parties.

According to PSigma Income fund manager Bill Mott, the most commonly expected outcome would also be the worst possible for the markets.