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U.K. election: The worst, best and most likely scenarios for stocks worldwide

The U.K. general election is just a week away, and forecasts
for how the June 8 vote will turn out have left the pound
twisting in the wind.

Could the election also rock stocks worldwide?

There’s not much chance of that, according to strategists. But
in the unlikely event of a big flop by the governing
Conservative Party, there would be a selloff for U.K. equities
or even for markets around the globe, they say.

We’ve kind of seen that British movie before. It was just last
June that markets from the U.S.

SPX,
+0.37%

 to Asia

ADOW, -0.16%

 tumbled in the immediate aftermath of the U.K.’s vote to leave the European Union,
though they went on to shake off Brexit worries and rally to
new highs.

This June’s vote is also all about leaving the EU. Prime
Minister Theresa May said she called the election to make sure the
British parliament is not divided
as the country kicks off
exit talks with the trade bloc’s other 27 nations.

But the pound

GBPUSD, +0.0621%

fell to its lowest level since mid-April on
Wednesday
, hit by worries that May’s gambit might backfire.

Sterling’s slump came as a YouGov projection indicated the
election could result in a “hung parliament,” where no
party has a clear majority. The model suggested the opposition
Labour Party, led by Jeremy Corbyn, could add almost 30 seats
in the legislative body and the Tories lose 20, wiping out
their advantage.

With that in mind, here are what market strategists think are
the worst-case, best-case and mostly likely scenarios for
global equity markets.

The nightmare scenario for stocks worldwide

The worst case for stocks worldwide would be the Labour Party
winning the election, either outright or at the head of a
coalition, said Colin Cieszynski, a Toronto-based chief market
strategist for CMC Markets.

“Labour’s far-left, out-of-the-’70s program could create
economic uncertainty and send global stocks into a tailspin,”
he told financecapital. “As we enter the weaker season of the year
for stocks, which runs through mid-October, it wouldn’t take
much to tip over the current house of cards.”

See: Here’s the real story behind “sell in May and
go away”

In this scenario, the U.K.’s FTSE 100

UKX, -0.19%

might end up as a bright green spot in a sea of red. That’s
because the British benchmark tends to benefit from a falling
pound, as the weaker currency boosts the foreign-denominated
profits made by the index’s multinational companies.

The pound “may trend the same way as indices outside the U.K.,
and the FTSE could break ranks and go the other way,”
Cieszynski said.

Other strategists expect pain for British stocks if Corbyn’s
party makes a strong enough showing to go into government — but
not a global selloff.

“If the Labour Party unexpectedly wins next week, then we would
expect to see a sharp shock in the U.K. stock market, as
Corbyn’s tax-and-spend plans could hurt the U.K. corporate
environment,” said Kathleen Brooks, a London-based research
director at City Index.

“We don’t think that the outcome of the U.K. election will have
a meaningful impact on global equities,” she told financecapital.
“It is likely to have a localized impact only.”

The chances of leftist veteran Corbyn taking the helm of state
seemed pretty slim in April, when May decided to call an
out-of-cycle “snap” election. The Conservatives looked set for
a landslide win, as opinion polls put them ahead of their main
Labour rivals by 20 percentage points. But that lead has since
faded to a gap of just 3 points, the latest research shows.

The best-case outcome for global equities

You might not want to count on a stock rally even if May and
her Tories do triumph.

Cieszynski sees equity markets largely staying steady, if the
result is a solid victory for the prime minister’s party.

“The best-case scenario for stocks is a similar or increased
Conservative majority government, which could help to shore up
support for global indices at current levels, but probably
won’t add to gains,” he said.

See: Theresa May is doing a great Hillary Clinton
impersonation with her campaign

The most likely scenario — ‘a wasted exercise’

As things stand right now, most analysts see the Tories winning
control of parliament, but with a much slimmer majority than
was expected a month ago.

Traders might not place big bets, given that prospect.

“This election may not change things in parliament very much,
so it could end up being a wasted exercise,” Brooks said. “If
this happens, then we think that the market reaction will be
muted.”

The City Index team doesn’t think that a vote for the status
quo will impact the FTSE 100 in a meaningful way. The economic
health of the U.K. is much more important than the election to
the market, she said.

Cieszynski also believes that despite the narrowing polls, the
Conservatives will prevail to set up another majority
government.

“This would likely spark a rally in GBP and a selloff in the
FTSE,” he said. “The impact on markets outside the U.K. is
likely to be neutral, as this has been expected for some time.”

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