How do UK general election opinion polls help investors?
How much will British opinion polls sway speculators?
On June 23, 2016, we all headed to bed safe in the knowledge that the UK had voted to remain in the EU in that day’s referendum – or with a sense of defeat, depending on our viewpoint. Hedge-fund managers, however, knew otherwise.
They’d hired private polls and made eye-watering profits on the shock result the next day. The then Tory Prime Minister David Cameron (above) quit within hours.
According to a damning report by Bloomberg, hedge-fund manager Brevan Howard had bought exit-polling data from market research company ComRes (and possibly others), making $160 million on 24 June alone. It had happened before at the Scottish referendum in 2014. Stocks fell by billions when polls revealed a yes vote ahead of the official outcome.
The Bloomberg investigation found that market research agency Survation had sold last-minute polls and a syndicated exit poll for the Scottish referendum to some of the world’s biggest hedge funds, which allowed their clients to place bets while voters were still casting ballots.
Naturally, a hedge fund manager would want the most accurate and up-to-date information and polling companies have always provided private clients with survey data – that’s just efficiency. Nothing wrong with that, right?
How can investors understand UK election opinion polls?
“In any election there will now be almost daily published polls on the state of the parties and who is ahead in the horse race,” says Ben Page, chief executive of market research company Ipsos MORI and visiting professor at King’s College, London. “These provide a good idea of the overall state of the parties at a national level, which policy ideas are cutting through, and the performance of the leaders,” he says.
“By aggregating these and looking at the moving average, investors can have a good idea of the direction of travel, and possible outcomes. But only so far. Huge caution is needed in Britain if the race is tight and uncertain because very simply, percentage vote share does not translate simply into percentage seat share – in 2010 David Cameron got a higher percentage of the votes cast than Tony Blair did in 2005 and found himself having to go into coalition, whereas Blair had a 60 plus majority.”
When is it is clear that one party is so far ahead, that the outcome is virtually certain – as with Labour in 1997 – there is less advantage in having detailed private polling, says Page, “But 2017 showed how much things may change in a campaign and in the current situation a key benefit of detailed private polling is that it allows investors to concentrate on the minority of seats that the parties are targeting.
“National polls only tell us the headline figures, not how many seats will change hands,” Page explains. “Typically a British election is decided in only the 20 per cent or less of constituencies that change hands – there are hundreds of seats where no polling is needed as we can tell you now, with almost 100 per cent certainty which party will win, for example Doncaster.”
Doing private polling in the 20 per cent or so of marginal seats can provide investors with a much clearer idea of possible upsets and surprises and therefore the ability to make decisions that relying simply on national polling results will not do.
What are the rules on private polling for investment?
In September the FCA (Financial Conduct Authority) set out guidelines for how it expects firms and individuals to handle information that has the potential to be inside information.
Market abuse regulation (MAR) states that inside information is “information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.’”
The FCA gives an example of an established polling firm due to publish results and which could affect the price of government bonds traded on regulated trading venues. If these results are shared prior to publication then it could be an offence for anyone in possession of the information to trade in the relevant government bonds in advance of publication of the polling results “if it is trading on the basis of the anticipated bond price movement that will result from publication of the results.”
However, when the inside information definition is not met, MAR does not impose a restriction on individuals and firms collecting or receiving polling information relevant to financial market prices – even while polls are open. In addition, forex trading is not covered by MAR’s insider dealing provisions but instead the FCA points to its principles for business and other pertinent business/industry-specific legislation.
It’s illegal for pollsters to provide the public with the information they provide the hedge funds with. This prompted the then-chair of the treasury committee Nicky Morgan to urge the head of the British Polling Council to explore new regulations for "market-sensitive polling" unless the polling companies were more transparent about who they were working for. She said: “At worst, there could exist a perverse incentive for polling companies to provide misleading or inaccurate information to the media, while providing high-quality analysis on the true state of public opinion to private clients.”
Labour member of the upper House of Lords George Foulkes, agreed, describing the case for statutory regulation of polling companies as “now overwhelming.”
British opinion polls and how they affect investment
Patrick Connolly, chartered financial planner at Chase De Vere, warns that British election polls, private or otherwise, can just simply add to the noise. “Around an election there will be polls coming out, some of them will move markets, for sure,” he says, “but we’re very wary of moving client portfolios or taking a wholesale stance based on background noise. Some people use them to great success and others to great failure. If you get it wrong it’s terrible. We tend to take a more long-term and consistent approach with our portfolios.”
Ranko Berich, head of market analysis at Monex, agrees: “We currently believe that on balance a weaker dollar and the removal of no-deal risk will allow GBP/USD to trade to 1.30 by the end of the year. For now, our base case is that recovering investment in 2020 supports a GBP rally above 1.40 by the end of next year. The outcome of the UK general election 2019 adds some uncertainty to this picture, he says, “but not as much as might be supposed.”
Whatever the latest UK general election polls show, Berich adds, “Ultimately, December will see a four-party election fought over the dual axes of Brexit as well as the traditional left-right divide, making empirical prediction methods profoundly unreliable. Predicting the outcome of the election will be a mug’s game and either outcome should be taken seriously by investors."