UK election sparks fears of uncertainty

British Prime Minister David Cameron's Conservative Party wants to fix its budget deficit through harsher austerity and more spending cuts. Picture / AP

With Tories and Labour so close in polls, comes risk of small parties sharing power.

The 2015 UK general election is almost upon us and it's shaping up as one of the most interesting and unpredictable contests in decades.

From the viewpoint of financial markets, none of the likely outcomes look particularly encouraging.

While a continuation of the status quo is probably most preferred, that would still mean increased risks of discord with the European Union (EU).

A Labour-led coalition would mean looser fiscal policy, which markets wouldn't like either.

Britain isn't nearly as important as it used to be for New Zealand, but as our fifth biggest export market, it still matters. The two-way trade between the countries is worth $4.7 billion with meat, wine, fruit and wool the biggest exports.

The two main parties in Britain, the Conservatives (think John Major and Margaret Thatcher) and Labour (Tony Blair, Gordon Brown), are neck-and-neck in the polls.

The traditional two-party system has broken down in recent years, with their combined support sitting at just 65 per cent, having peaked at about 95 per cent in 1950.

With neither incumbent Prime Minister David Cameron's Conservatives nor the Ed Miliband-led Labour Party likely to gain a majority, there is an increased chance of a minority government, a hung Parliament or even a new election.

The currency is feeling the brunt of this uncertainty, with investors choosing to steer clear of the UK until the political landscape becomes clearer.

The pound is now buying less than US$1.50, compared with above US$1.70 in the middle of last year.

Similarly, the New Zealand dollar is 7.5 per cent higher against the pound relative to six months ago.

Watch: UK campaign trail: Energised Miliband upsetting the odds

However, the UK sharemarket has shrugged off any election worries with the FTSE100 rising 7.4 per cent in 2015, ahead of both US shares and New Zealand shares. This is probably because 90 per cent of FTSE100 companies are global, rather than domestic. They are exposed to the wider global economy much more than the UK, and they also see some benefits from a weaker pound.

If the Conservatives stay in power, they have committed to a referendum on EU membership.

A Conservative government is in favour of staying in this group, but would look to renegotiate some of the key terms.

Watch: UK campaign trail: Profile of David Cameron

The 28-country EU is not to be confused with the 19-country Eurozone monetary union, which shares the euro as its currency.

The economy would also be handled quite differently under both regimes.

While the UK economy is in pretty good shape, its budget deficit is one of the worst in the developed world.

To fix this, the Conservatives are proposing harsher austerity and more spending cuts, in the hope that short-term pain will lead to long-term growth. Labour would rather increase taxes to avoid having to cut spending.

The biggest risk is an unclear outcome where multiple smaller parties with disjointed agendas end up sharing power.

This would create the most uncertainty and give rise to more volatility - two things financial markets and investors despise.

Watch: UK campaign trail: Final pitch for power

Mark Lister is head of private wealth research at Craigs Investment Partners This column is general in nature and should not be regarded as specific investment advice.