The failure of equity markets to price in the likelihood of anything other than an increased Conservative majority in the UK General Election could have major negative short-term implications, the lead manager of Franklin Templeton's UK Equity Income fund Colin Morton has warned.
The manager of the £400m UK Equity Income fund, who earlier this year indicated that Prime Minister Theresa May could be a "steady influence" on markets, warned equities could take a hit on 9 June, as opinion polls continue to narrow.
"Equity markets feel that there is an absolute certainty that May will have a majority - that is how it is pricing itself," said Morton.
"It is saying that even though the lead has fallen, we still see the fact that she will have a strong majority.
"The market is not pricing in the Tories having either less of a majority or failing to achieve one at all and it would put a lot of pressure on equity markets on 9 June [if that was the outcome]."
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The most recent YouGov opinion polls show that the Conservatives lead has fallen to just four points, down from around 20 points when the election was first called.
"What we have all learned over the last year or so is that there can be a real risk if you do not price in seemingly less likely political results, you can get caught out," said Morton.
"If we have a huge shock and we see a heavily reduced Tory majority or even a Labour win, that would cause a very big, short-term impact on the market.
"A coalition of any sort is also likely to have a detrimental impact. Any less of a majority short of what May currently has would almost certainly be a down day on the market - it would put us back into the position we were in a few months ago where there is a lot of political wrangling and difficulty in pursuing Brexit."
Will the 'May bounce' last the summer?
Calm in equity markets, said Morton, is largely due to the confidence the Prime Minister will be in a stronger position to deliver the UK's exit from the EU, without major political opposition.
"Markets are already encouraged by the fact that we did not have the Brexit collapse that a lot of people were predicting a year ago," he said.
"And with May, there is a feeling that she will get a much-enhanced majority, helping to see sterling rally."
In addition to the confidence that May would achieve a much stronger majority in the House of Commons, Morton identified the precedent that the House of Lords does not fight policies that are in a party's manifesto as reason for the market backing the Prime Minister.
In addition, the next election is not scheduled to take place for three years after Brexit negotiations are due to finish, removing a degree of political risk for investors during that period, he said.
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