UK hung parliament: Global outlook unscathed by election shock
- Contrary to expectations, the Conservative party lost its parliamentary majority as Thursday’s snap elections resulted in a hung parliament.
- A minority government with the support of DUP is now the most likely scenario.
- This development makes the outlook around Brexit negotiations even more uncertain, as a less stable government is now faced with a weak negotiating position and a tight timeline.
- From an investment perspective these events do not constitute a game changer on a global scale, although an increased risk premium for UK assets is justified given the increased uncertainty.
The UK general elections have resulted in a hung parliament, confounding the general expectations of the market. By Bill Papadakis, Strategy Team, Lombard Odier.
While, from an investment standpoint, we do not see the UK election outcome as meaningfully disruptive for the global economy or its markets, an increased risk premium in UK assets is justified given this new bout of political uncertainty.
At the outset of the campaign, most polls had suggested a comfortable lead for the incumbent Conservative Party. However, the tightening of polls towards the end of the campaign generated uncertainty – with some polls even raising the possibility of a hung parliament. In the event, these signs proved to be accurate with Prime Minister Theresa May’s government losing its majority and leading the UK into a hung parliament.
In calling the snap elections in April, Mrs May was hoping to significantly strengthen her majority in Parliament. With the 331 Tory seats now reduced to 319 –short of the 326 needed for an overall majority – it has become clear that her strategy has paid off neither for her party nor for the country at large. Despite the criticism she might receive regarding her campaign decisions, Mrs May appears to have no intention of stepping down. The most likely scenario at this stage is therefore a minority Conservative government, propped up by the Northern Irish Unionists of the DUP (which won 10 seats). This would not make for a particularly stable government coalition, and could generate a significant amount of uncertainty in the UK policy environment. As a result, the possibility of new elections in the near future cannot be ruled out.
We have, in the past, highlighted that the most critical aspect of these elections was the ability of the resulting UK government to negotiate the terms of Brexit with the remaining EU members. While markets were looking for an improvement in Mrs May’s negotiating position – a comfortable majority in Parliament would have provided her with additional flexibility in the negotiating process – this argument has now been turned on its head. The UK government, today, finds itself in a messy situation: in 10 days’ time Mrs May must lead official Brexit negotiations, and she will do so with a government that is weak and, therefore, in a poor position to negotiate and faced with a strict deadline. The triggering of Article 50 on 29 March 2017, set off the exit process, which must conclude within two years, (unless there is unanimous agreement for an extension). With the UK political landscape in such turmoil, the outlook for this highly complex process – with its ever-tightening deadline – just become much more challenging.
From an investment standpoint, we do not see the UK elections as a game changer on a global scale. As stated, an increased risk premium in UK assets is justified given the increased uncertainty, but the world economy is enjoying a broad-based improvement which leads us to maintain our constructive outlook for risky assets (with a preference for Eurozone and Emerging Markets assets).
As we have often argued, for the UK, the most important economic challenge will now be the rebalancing of a record financial deficit at a time when it is breaking ranks with its largest trade partner.
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