Need to Know | 12th March 2015

Election odds: Tories are now more than 60 per cent favourites to win the most seats

A hung parliament is an 80 per cent certainty. After the SNP surge, Labour’s chance of a majority has collapsed to 5 per cent.

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Over the past few weeks the odds market has been eventful and there is much more to come.

Since October the market has predicted a hung parliament, but that has evolved from being a slight favourite to a racing certainty. The probability of ‘no overall majority’ has now settled at around 80 per cent.

Whilst the chances of a Tory majority have been relatively flat over the past six months (dipping from 20 to 15 per cent), the probability of a Labour majority has collapsed. Their chances have gone from one in three to one in 20. That’s as close to saying “no chance” as the market is likely to get.

Whilst the fall in Labour’s support has been a long term trend there was a paradigm shift in early February. There are several reasons for this but the most obvious one was the market finally taking the rise of the SNP in the polls seriously.

So with a hung parliament very likely, the next question has to be who will be the largest party. Here the news is equally grim for Labour. In September 2014 the market thought they had a 60 per cent probability of being the largest party. The edge was gradually taken off this advantage until we ended 2014 on the odds market equivalent of a coin toss.

By February this coin toss had turned slightly in favour of the Tories. Then Labour’s hopes dived when Ashcroft’s constituency polls confirmed the SNP surge was “real” (his words).

After a short ‘dead cat’ bounce the market slowly but surely sold Labour and bought the Conservatives. Now the Tories are to the Tories are 62:37 favourites to be largest party (the odds don’t add to 100 because of long bets).

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Things look slightly less dramatic if we rework those axes.

But the story is the same. Short of an SNP collapse, it’s unlikely Labour will regain their advantage, which is probably why the Conservatives are promoting posters of Alex Salmond with Ed Miliband in his pocket. Not only does it help the Conservatives in England it also takes the legs out of Labour in Scotland.

That’s probably why the market remains broadly, but not quite as unequivocally, supportive of the idea Cameron remains Prime Minister after the election (58 per cent) over Miliband (42 per cent).

Earlier this year I argued the rise of the SNP should not to be taken seriously until the odds market had spoken. Polls point to the SNP winning nearly every Scottish seat. The markets still aren’t taking that seriously, but the SNP are now 80 per cent favourites to be the largest party in Scotland.

Cameron is a 58:42 favourite to remain as PM.

The polls and the odds market now seem to be coming into line with one another. That’s a powerful indicator. But all is not lost for Labour, there is perhaps one silver lining. The Tories may be the largest party, and Cameron may even be favoured to remain in Number Ten, but that doesn’t match up with odds on what shape the next government will take.

The odds on the next type of government is not exactly liquid, so it has less predictive value, but it has been more active lately. And a Labour minority government has emerged as the market’s favoured outcome (although it’s only a 20 per cent likelihood).

I suspect this and a Tory minority are going to become the main options for the next government. The question is, given all of the above how can anyone take a Labour minority seriously? We’ll know in the next few weeks as the money flows in and the predictive value of the market increases. We’ll cover any news here on May2015.