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UK election: Corb your complacency

Another day, another survey showing the Conservatives’ lead in the UK election race narrowing. Cue excited headlines about hung parliaments and bitter post-election Tory recriminations. The financial markets barely shrugged. Is their insouciance justified?

The UK currency, the most visible barometer of sentiment, remains around the same level as when the election was called — despite Theresa May’s poll-of-polls lead having shrunk 13 points in that time. Risk reversal volatility, a proxy for investor interest in protection against sharp falls, is way off last June’s levels. Gilt yields have fallen and equity prices risen. Markets do not believe Jeremy Corbyn, Labour leader and critic of big business, has any hope of winning.

They may have factored in the historic tendency of opinion polls to understate Tory support. This was dramatically the case in 1992. Even in 1997, when Labour won a crushing victory, more people than forecast voted Conservative.

Or perhaps investors pick indicators that tell them what they want to hear. This is a common bias, apparent during last year’s EU referendum. The polls were consistently close. The bookies’ odds preferred by the City strongly (and wrongly) favoured Remain.

This year, both betting and even narrowing polls suggest Mr Corbyn is very unlikely to win, or even to deny Mrs May an outright majority. These are the only outcomes investors fear, hence their sangfroid. The scale of her victory and the make-up of her cabinet and backbenches will fascinate pundits. But these factors will dictate the shape of a Brexit deal less than imagined by commentators, who have their own cognitive biases. The terms of Britain’s departure will depend on what is acceptable to 27 other governments.

There is one more factor. Pollsters’ failures to call the EU referendum or the US election correctly were largely down to incorrect adjustments for turnout. Models have since been modified. If they have over-compensated, a surprise is possible. Investors should feel comfortable — but not complacent.

Email the Lex team at lex@ft.com