Prime Minister Theresa May’s Conservative party has lost its overall majority while remaining the largest party in a hung parliament, after Labour makes good progress.
At the time of writing, Theresa May is going to visit the Queen at Buckingham Palace to seek permission to form a government. The Tories are projected to get 319 seats versus 261 for Labour, although 326 seats are needed for a technical majority. Sterling slides 2% against the dollar.
Financial markets are starting to ponder what the election result – in which no party has a parliamentary majority – means for investors.
The results from yesterday’s UK election will likely be a warning of further policy uncertainty. This will most clearly be felt in Brexit negotiations, with EU counterparts likely to be disappointed by the lack of a decisive government mandate. Brussels had hoped that a strengthened Theresa May would be able to make the necessary compromises needed to reach a Brexit deal.
The implications for domestic policy, particularly welfare spending, would point to a further push-back on austerity, with potential for further borrowing and wider deficits. Domestic demand appears unlikely to be affected by the result, although we note from our recent asset allocation meeting that consumer confidence has been declining this year.
The immediate consequences for financial markets are likely to be a weaker currency and higher bond yields. UK equity markets are likely to continue to move in line with the currency.
Recent history suggests that political events, however unexpected or uncertain, have limited impact on asset prices. We would expect a similar reaction after this election, particularly as markets will be digesting potentially ambiguous outcomes. A softer Brexit may be more supportive for Sterling, but political uncertainty may reduce the central banks appetite for raising interest rates. Greater government spending may be negative for bond prices, but quantitative easing can limit any material decrease.
In this week’s asset allocation meeting, we reaffirmed our negative bias on Sterling. This is mainly predicated on a weaker than expected output for the UK economy and the lack of higher interest rate support. We are negative on bonds and we would expect the consequences of today’s election to lead to shorter-dated bonds out-performing longer-dated ones. Risk assets will continue to be guided by fundamental factors and we see no immediate global impact from the UK election, hence we maintain our neutral weighting to UK equities.
As a new government emerges, we will look for evidence of any policy shifts and potential Brexit outcomes to shape our views going forward.
If you would like to hear more views from our Investment Team, please contact firstname.lastname@example.org.