Up until a couple of years ago, there was one fairly accurate way to predict the outcome of political events. It wasn’t opinion polls, and it wasn’t TV commentators. In fact, the Betfair exchange markets usually called the result or any election or referendum correctly.
Then things changed.
It started in 2015 when Betfair had Ed Milliband as favourite for next Prime Minister. Yes it seems silly now, but at the time, although the Conservatives were favourites to win most seats, it was felt that Labour would not be far behind, and would be able to form a coalition.
This was the first time I can remember the markets getting it badly wrong. As we now now, the Conservatives ended up with an overall majority and David Cameron was returned to Downing Street.
The EU Brexit Referendum
Then came Brexit. And boy, did the markets get that one wrong!
I remember clearly that even on polling day itself, Remain was trading at about 1.15 on Betfair. That’s an implied probability of 87%. And we all know how that one turned out.
The US Presidential Election
Hot on the heels of Brexit came Donald Trump. At every stage, from nomination to election, he wasn’t given a chance by any pundit or commentator. The markets agreed. Hillary Clinton was the overwhelming favourite, Trump could be backed at double figure odds on many occasions.
Anyone who took that bet was laughing all the way to the bank.
So does the smart money back the outsider from now on? Or were these recent examples just a blip?
Well, we’re about to find out. Because coming up we have the French presidential election and the snap UK General election. In both markets we have overwhelming favourites.
Firstly, Emanuel Macron…
And of course in the UK, the Conservatives look nailed on to win with an increased majority…
It’s hard to see either of these losing, although you would never catch me backing anything at 1.08.
With the EU referendum, I think the problem was that it was a complete unknown. We’d never had anything like it before, and the polls before voting were swinging back and forth between the two outcomes. In reality it was too close to call, which made the price of Remain ridiculous. Hindsight is a wonderful thing, but using it, it’s obvious where the value was.
In the case of Trump, I think the markets failed to take into account the level of disillusionment in the country. Clinton deserved to be favourite given the data available, but again the price was too low.
In the upcoming elections, there doesn’t seem to be any silent majority that has been discounted by the market, neither are the polls swinging back and forth. The two favourites are comfortably ahead and have always been ahead. So in these cases, I think the markets are accurate. However in future, I’ll be watching for more instances of potential value outsiders in markets like these.