While a Labour victory in the General Election may still be highly unlikely, there has been a clear surge in support for Jeremy Corbyn in recent weeks. The Labour party has been able to narrow the Conservative party's lead significantly, with YouGov now forecasting a hung parliament.
Therefore, if Labour's momentum continues into Thursday's election, the party could gain a considerable number of seats. While this may be viewed as a positive event by many voters in the UK, investors may think otherwise.
Perhaps the most obvious impact of a strong result or even a victory for Labour could be a decline in the value of sterling. While many of Labour's policies may prove to be successful in the long run, ultimately they represent a major change from the status quo. For example, Jeremy Corbyn plans to nationalise a number of industries, including energy suppliers and rail companies. This could create a significant amount of uncertainty and even fear among investors, as they look ahead to which other companies and industries could become state-owned.
The Labour party is also seeking to change tax rates. While they may only effect top earners directly, increases to corporation tax could lead to lower business confidence in future. The UK's status as a popular place for international companies to do business may come under pressure, which could lead to further downgrades in the UK's economic outlook.
Just as the aftermath of Brexit saw a weaker pound emerge, a Labour victory could do likewise. That's not because the policies they are seeking to adopt will necessarily be unsuccessful in achieving their objectives, but rather because they represent change. Investors have historically been averse to major change.
The effect on the FTSE 100 of a strong Labour result or even victory in the upcoming election is possibly less clear than for sterling. One the one hand, increased uncertainty and fear among investors could cause sentiment towards UK-focused stocks to come under pressure. However, on the other hand a depreciation of the pound could lead to rising profitability and share prices for international companies which report in sterling.
Overall, though, the decline in investor sentiment is likely to more than offset the gains made by a possible depreciation of sterling. Although the FTSE 100 is made up of international companies, many of its incumbents still rely on the UK for a sizeable part of their sales and profitability. Furthermore, if business confidence in the UK falls after the election result, it could lead to a knock-on effect in Europe and the rest of the world at a time when risks to world growth are already high.
While a Labour victory may be unlikely, a strong campaign by Jeremy Corbyn has made the outcome of the election harder to predict. A good performance by Labour could lead to falls for the FTSE 100 and for sterling, which may create significant uncertainty for investors in the short run. However, while this may be a challenging period, it could present a buying opportunity for investors who can focus on company fundamentals, diversity and, most importantly, the long run.