Based on current party positioning, we envision three plausible scenarios and assign probabilities to each:

1. Comfortable Conservative majority – 60% Probability. Johnson to push through Brexit through by January 31, 2019.

2. Conservative Party wins the most seats and governs as a minority – 20% Probability. Brexit by January 31, 2019, but a “bumpier” ride, possibly including a Second Referendum.

3. Conservative Party wins the most seats, but Labour and Liberal Democrats capture enough seats to form a government – 20% Probability. Under this scenario, there is likely to be a Second Referendum, resulting in a 10% probability for “Leave” and a 10% probability for “Remain.”

Combined, these scenarios produce the following probabilities, we believe:

1. 85-90% chance the UK leaves the EU with a Deal by January 31, 2019

2. 10-15% chance the UK ends up remaining in EU after all

We should emphasize that we struggle to see a scenario where Labour wins an outright majority.  This is very important, as one bearish outcome for UK equity markets would be the unencumbered implementation of Jeremy Corbyn’s left-wing agenda. If Labour gets “near” government, it would only be as part of a coalition, which would restrict them considerably.

What Will Happen Next—And What Will It Mean For Investors?

If we awake on December 13 to news of a comfortable Conservative majority, it will probably be the most market-friendly short-term outcome.  The Conservatives will, presumably, follow through on the withdrawal agreement that Johnson agreed to in October 2019 – this will ensure a transition period between the UK and EU while further trade arrangements are negotiated in the coming months.  Furthermore, Johnson has pledged significant fiscal stimulus from his government should he win.  This should further cement a Conservative majority as a significant “win” for financial markets and UK risk assets. It is worth noting that this fiscal stimulus would echo what we see currently happening in France and Holland, while the possibility of German fiscal stimulus would be the real dynamite to kick-start European economies