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General Election 7 May 2015

The 2015 General Election leaves room for guesswork as to possible permutations. Are there any firm assumptions at this point?

  1. It is unlikely that any one party will secure a significant majority to govern on its own.
  2. The Conservative vote is expected to see attrition, with some support shifting to UKIP.
  3. Considerable polling evidence suggests a collapse in Liberal Democrat support in their south west England heartland. A ComRes/ ITV poll (15th April 2015) said the 14 Lib Dem seats in the South-west were at risk from an advance in Labour and UKIP support. But assuming the Liberal vote holds up, will the Lib Dem leadership risk another term in the Coalition?
  4. Labour will be hurt by the loss of support in Scotland. The resurgent SNP is expected to gain voters supporting its stance to hold Westminster to its referendum promises. Despite comprehensively losing the referendum the SNP are already acting as power brokers in the 2015 parliament. Of the 59 Scottish seats – 41 were Labour in 2010 and around 39 are expected to be lost in 2015 to the SNP. Even Gordon Brown’s Kirkcaldy seat is at risk.
  5. Can UKIP, a party with 2 MPs (Conservative defectors) at Westminster, largely focused on one individual and one policy become a major new force in UK politics? Is there any evidence of a national shift to the right pushing UKIP? Can significant support for UKIP be assumed?

Starting in 1997, UK politics has been centrist. Blair’s three victories were possible because Labour shifted into the centre whilst maintaining its core left wing support. The Coalition is also an expression of centre politics as at 2010. The 2015 election will be fought, and won or lost in the key 85 marginal seats. This election will also see big fights in heartland areas. On 5) my point is UKIP support is too fragmented to be a national force. UKIP are specifically targeting only 8 seats.

In 2010 the Coalition began austerity policies aimed at deficit reduction that were initially poorly received. In 2013-2014 UK GDP growth accelerated as did the property recovery. The Bank of England’s willingness to delay base rate hikes and a drop in petrol prices has helped consumers. Normally this “feel good” would boost an incumbent government. Hence there is little reason to expect a shift from the centre or realignment.

The betting market tends to be more accurate than polling data. The odds suggest:-

  1. 5/4 “Any Coalition involving the Liberal Democrats”
  2. 7/2 Conservative minority
  3. 15/2 Conservative majority
  4. 8/5 Labour minority
  5. 41/1 Conservative / UKIP coalition


Clues from the Elections past…..1974

I draw a parallel with 1974. In the run up, 25 of 26 polls gave the Conservatives a lead of between 2%-9%. However in February 1974 Labour won a slim majority (Labour 301 gain 20; Conservatives 297 loss 37; Liberals 18 gain 8; SNP 7 gain 6; UUP 7 gain 1). Both the Liberals and the Ulster Unionists refused to back the Conservatives leading to PM Ted Heath’s resignation. PM Harold Wilson called a second election calculating voters would give him a sufficient majority. In October 1974 the voters delivered a workable majority; (Labour 319 gain 18 Conservatives 277 loss 20; Liberals 13 loss 1, SNP 11 gain 4, UUP 6 loss 1).

There are a few lessons from 1974:-

  1. A close result can result in a second election (the advantage would lie with the party that had gained seats).
  2. Assumptions of combinations and Coalition “deals” with the smaller parties to build a workable majority can be overstated. The Ulster Unionists (usually stalwart Tory supporters) were uncomfortable with supporting the Conservatives (who had lost seats). A similar conclusion about “not wanting to support the losers” was reached by Nick Clegg in 2010.

Miliband needs the SNP as a first step but the Liberals as well

Looking at the 2010 General Election results (Conservative 306 gain 97, Labour 258 loss 91, Liberals 57 loss 5, SNP 6 unchanged, Green 1 gain 1, Sinn Fein 5 unchanged, DUP 8 unchanged, Plaid Cymru 3+1, SDLP 3 unchanged, Independent 1, UKIP 0 unchanged, Alliance 1 gain 1) and by extension 2015 through the same lens, it is reasonably clear that Labour faces an uphill climb to get to a majority government – which requires 326 seats.

The problem for Labour is the potential loss of 39 seats to the SNP leaving them with a low base of c 219 seats. During the Election debate on 16th April, Ed Miliband categorically ruled out a Labour/ SNP alliance basically branding the SNP untrustworthy and saying there were too many “fundamental disagreements”. Taken at face value this reduces Labour’s chances of forming the next government. Labour would need a positive swing of c.107 seats on its own. We think this is unlikely under Ed Miliband.

Assuming the Conservatives lose 25 seats (half to Labour and half to UKIP), and using the Labour / SNP loss adjustment (-39), and assuming the Liberal loss of support (-14) delivers MPs in equal proportion to Labour and UKIP one can derive:

Party 2010 2015 Change
Conservative 306 279 -25
Labour 258 239 -20
Liberals 57 43 -14
SNP 6 45 39
UKIP 0 21 21
Green 1 1
Plaid Cymru 3 3
Sinn Fein 5 5
DUP 8 8
Speaker 1 1
Independent 1 1
Alliance 1 1
SDLP 3 3
Using this hypothetical “result” a majority government could result from :-

  1. Conservative/ Liberal/ DUP (330) but a 4 majority would be hard to work and deliver a 1974 situation.
  2. Labour/ Liberals/ SNP (327) would deliver a 1 seat majority and likewise like 1974 – but this would be very tough politically.


The logical upshot is another election would be required.

Both major parties want to balance the budget over the next Parliament. The smaller left wing parties want to end austerity. This greatly complicates any deal making in the race to no 10. My conclusion is the result is so uncertain, that speculation to some extent is pointless. There will certainly be a response once the result is known. However in the run-up period investors appear to be in a bullish mood and awaiting an outcome.  We suspect it will be a close result that is likely to result in another election.

 Who gains from another election? Air Partners (AIP) BUY

Air Partner leases aircraft such as Learjets, Challenger 300, Embraer Legacy and Cessna Citation to client governments, financial services companies, entertainers, sporting events and during elections. Air Partner is a UK Fledgling Index constituent. The UK Fledgling Index is designed for companies that are too small to be included in the UK All Share.

Company Air Partner
Share Price 360
Target Price 400
52 Wk Hi/Low 516/251
Shares O/S 10.26m
Market Capitalisation £36.94m
Avg Daily Volume 0.75m
Dividend Yield 5.99%
Key CatalystsA hung parliament necessitating another General Election would be very positive news for Air Partner FY 2015 due to the increase in aircraft leasing during election campaigns. In addition Air Partner said in February its Commercial Jets division was seeing better than expected performance. Ahead of Finals on 23rd April 2015 the valuation is undemanding on just £37m with no debt and a forward P/E 13.3x (based on forecast EPS of 27p FY15).

Source; Fidessa plc

Key Risks to Price Target

i) Aircraft leasing is a competitive market whose profitability is impacted by fuel costs

ii) Air Partner is a small capitalisation company hence high bid / offer spreads.

iii) The 2015 results are due on the 23rd April 2015 hence there is some short term uncertainty.

 Who gains from “more of the same” a Conservative/ Liberal coalition

Telford Homes (TEF) BUY

Telford Homes is a leading AIM listed London home builder – it reported interim revenues of £65.1m and pre-tax profit of £9.4m, EPS of 12.6p to end September 2014. The board have agreed to acquire a 5.5 acre site in Stratford with outline planning permission for 400 homes.

Company Telford Homes
 Share Price 440
Target Price 515
52 Wk Hi/Low 444/267
Shares O/S 60.25m
Market Capitalisation £264m
Avg Daily Volume 128k
Dividend Yield 2.33%
Key CatalystsThe Coalition government has been kind to Telford Homes – its shares have more than quadrupled since May 2010. Telford’s central London development pipeline of £1.1bn of primarily high rise residential developments should benefit from the same government policies aimed at encouraging residential purchases, such as extending “Help to Buy” and Property ISAs.

Source; Fidessa plc

Key Risks to Price Target

i) Telford Homes sales are sensitive to demand for property and government measures to stimulate property demand.

ii) Telford Homes operates in a competitive market for the supply of residential property.

iii) Risks in the development pipeline where Telford acquires with outline planning permission then faces delays or problems in getting full approval.

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