Investors in UK bonds and securities are preparing to navigate unfamiliar territory, with the likelihood that the May 6 national election will not result in a clear winner.
A hung parliament is one in which no political party has a majority of seats.
This situation is normal in many legislatures, such as the parliaments of Germany and Italy, but it’s rare in the UK.
The most recent hung parliament was in February 1974, which lasted until October that same year.
Before that, all the way back in 1929.
Conservative leader David Cameron came out on top in Thursday evening's TV debate gaining 36 per cent of the vote, ahead of last week’s winner Nick Clegg on 32 per cent and Labour Prime Minister Gordon Brown on 29 per cent, according to a YouGov poll.
But while Labor is currently trails in the polls, they could still win based on the number of seats.
In the May 2010 election, a total of 650 MPs will be elected, so if the largest party wins fewer than 325 seats some kind of coalition government will have to be formed.
And alarms are already sounding about how that bargaining will impact the economy and portfolios.
“A hung parliament is almost the worst thing that could happen. Any kind of decision-making will be very difficult. A hung parliament would lead us to be hamstrung in tackling the debt,” said Mark Ackroyd, currency strategist at Corporate FX.
Investors are also concerned that a lack of parliamentary consensus will delay legislative measures needed to reduce Britain’s budget deficit, which could hurt the pound.
“The common opinion is that a hung parliament is the worst case scenario for the pound, and for the UK economic recovery.,” Piers Curran, head of trading at Amplify Trading, told CNBC.com.
“Any legislation needed to cut the debt will take longer to pass.” The best case scenario for the markets is a conservative majority, as they have a slightly more aggressive deficit-reduction plan,” Curran said.
America Likes the Middle Ground
On the other side of the pond, a party split between the White House and Congress has a more stable track record, and has provided a boost to stocks.
And historically, there is actually little difference in the legislative productivity of Washington under divided government versus one party.
David Mayhew, a political science professor and Congressional expert at Yale University found that from 1947 to 1990, an average of 13 major laws were passed when one party controlled all the levers of power, compared to 12 when the president had to deal with either one or both houses of Congress being controlled by the opposition.
But could the UK replicate that? “The requirement for government to negotiate and compromise… can be seen as an advantage… that such consensual styles of government are actually better for tackling big, long-running policy challenges,” according to the UK Institute for Government Web site.
But investors are wary.
“Personally, I feel we need some sort of decisions on the economy sooner rather than later,” Ackroyd said.
“A hung parliament wouldn’t be quite the disaster some people have made it out to be. What we’ve seen in the past couple of weeks is that all three parties agree that tackling the deficit is priority no.1,” Curran said.
“In the UK, we’re just not used to it, which is why there’s uncertainty about it – and the worst thing for markets is uncertainty.”