11 May 2016

Polls ahead

As we march into the Brexit vote on 23rd June, all eyes will be on the polls. But before you place too much emphasis on the polls, remember how they failed miserably in the UK general election last year. In my opinion, there are good, trusty-worthy polls and there are bad polls.

by John Royden

Head of Research


The good polls are so called ‘wisdom’ polls because they come from what has been observed as the wisdom of crowds. Ask a crowd of people how they are going to vote. Let’s say you end up with 55% saying Stay and 45% say Leave.

But ask the same crowd who they think is going to win and you get what has historically been a more reliable predictor of the final outcome. This second wisdom poll might return 75% saying the final vote will be Stay and 25% saying the final vote will be Leave.

Another kind of wisdom is what goes on at the bookies. The odds quoted by the bookies are prices where they get a two way flow of business around their bid/offer spread and these have to reflect what the general betting population thinks.

Ordinary polls sub-divide into the good and the bad as well. You get on-line polls, telephone poll s and other random street interview polls. To participate in on-line polls you need to be politically motivated to sign up to them in the first place; and if the Leavers are more overwhelmed with political emotion, then you might find a slight bias here. 

In the 2015 general election I got the feeling that the telephone polls, whilst better than the on-line polls, were still biased by peoples’ lifestyles. I found myself drawn to the conclusion that a random poll of the UK would have found Conservative voters busy being working capitalists and less willing to surrender time to the pollsters; and the Labour voters perhaps being less likely to be engaged in commercial activity and more inclined to have the time to answer questions. I think that criticism can be applied to random street polls but in a much weaker way. 

In the context of the Brexit polls, where I am unsure of any main-stream political bias in Brexit voting intentions, I am not sure how relevant the biases might be.

So that all leads me on to where we are now, what the outcome might be and what happens next.

The current betting odds show a 70% chance of Staying and 30% chance of Leaving. I am going to follow the wisdom of crowds and predict that we stay. So, how can we use the polls to help us predict what the markets are going to do?

There is a weak correlation between the price of the pound and the betting odds recorded over the past ten weeks. The same is true of the FTSE100 and the polls: when we are more likely to vote to stay, the values of both the pound and the FTSE100 rise. If you use statistics to predict the values of the pound and the FTSE100 on the announcement of a Stay win, you end up with the $/£ at $1.50, €/£ at €1.33 and the FTSE100 at 6700.

Although I’d love to be able to sell some shares with the FTSE100 at 6700 to fund the purchase of euros at €1.33 for my forthcoming family bucket and spading on the Ionian island of Paxos, I doubt I will be that lucky. I feel happier with the currency predictions than I do with the FTSE100 being at 6700 in six weeks’ time. 

Brexit is not the only factor that drives the FTSE100. The wider economy has a strong influence as well: on the positive side we see low UK unemployment, real wage inflation of c2%, however against this we have slowing retail sales and a soft Q1 GDP number.  We are also seeing weakness in the manufacturing sector as well as weakening GDP numbers.

So there is more economic worry around than there was three months ago, which is why I don’t think that businesses are lining up to initiate all the investment that they delayed in the run up to the Brexit vote. With summer holidays looming, I think most investment will get put off until the autumn. And that takes me to expect a stronger and happier finish to the year than we had at the start.

The distant black swans include China imploding, as it struggles to pay its debt, and then crashes into a deflationary debt default spiral, which the doomsters were forecasting a year ago. Personally, I see that China’s growth has slowed gently over the last five years and has not sparked a crash. I see no reason why growth should not continue to decline gently without driving an economic collapse. Slower growth should mean lower interest rates and an enhanced ability to manage the Chinese debt burden - I know others disagree with this view, so you have to take your own line on this one.


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