UK election - hung parliament


Prime Minister Theresa May’s gamble of calling a snap election in a bid to increase her majority and provide her with a strong mandate has spectacularly back-fired. Labour under Jeremy Corbyn has been resurgent.

The UK General Election has resulted in a hung parliament with no party commanding an overall majority. The Conservatives have emerged as the largest party and this led to Prime Minister Theresa May visiting the Queen to confirm the Conservative Party’s intention to form a minority Government alongside the Democratic Unionist Party (DUP), which won 10 seats in Northern Ireland. This combination could provide the Conservatives with what is essentially a working majority.

Unless stability can be quickly restored, Conservative dissenters may choose to block any substantial progress on divisive issues and the Government may have to make significant compromises to achieve its goals, both internally and towards the DUP. This does suggest a less stable Government, one that will have to make concessions and seek a consensus when introducing changes to legislation. There are of course now question marks over the future of Theresa May following the highly disappointing performance in the General Election, though many Conservatives are unlikely to push for a leadership challenge until we have seen a period of some stability. Its also worth noting that there has also been talk that Labour will be waiting in the wings to form a minority government with assistance from the other parties, though this is viewed as less likely to happen in the near term owing to the combined position of the Conservatives and DUP.

From a Brexit point of view, this election result could also cause damage to the UK’s negotiating position as without a strong mandate, Europe could arguably ignore the UK’s demands. However, this result could reduce the chances of a ‘hard’ Brexit or a ‘no deal’ Brexit.

The immediate reaction in the markets on the Friday morning focused on Sterling, as was the case for the Brexit referendum. Sterling has fallen by approximately 2% against its major rival currencies, though this is arguably less than could have been expected bearing in mind the hung parliament. The FTSE 100 Index rose as its high exposure to international companies has benefited from the weaker Sterling, but more domestically-focused stocks such as housebuilders did suffer some falls as did the FTSE Mid 250 Index though we did not see the significant falls that followed the Brexit result a year ago.

Markets and particularly Sterling are likely to remain volatile in the very short-term owing to the increased political uncertainty and especially until we see who forms the new Government. It is also possible that we could see a second general election later this year, particularly if the minority Conservative Government should fail to pass its next budget. We do not believe that this should be viewed as a time to panic as we now look for the political landscape to settle down after this shock result. 

This article is for information only and is not to be taken as Financial Advice CA1339    Exp 06/2018 

[ Date Posted: 15/06/2017 12:35:23 ]