London – Consistent with a year that has delivered political surprises, the UK general election has yielded another unexpected election result, or rather no clear result.
We now face the prospect of a hung parliament or a very small Tory majority. Theresa May, the Tories and the SNP are the losers in this election. There are few winners in the sense that the uncertainty this produces is not good for the UK.
DUP the kingmakers
In terms of seats, it now looks like the Tories will be about eight seats short of a 326-seat majority and will have to count on the ten seats of Northern Ireland’s Democratic Union Party (DUP) to form a government. The fact that Boris Johnson, who has not performed well as Foreign Secretary, is now considered for PM is ultimately a negative. Another notable development is the fall in the number of seats for the Scottish National Party (SNP). This means that Scottish independence is now off the table.
With Brexit in mind, this can only damage Britain’s position – Brexit will be negotiated by a weakened government, chided by an opposition yet uncertain on Britain’s place in Europe. Only 11 days before the Brexit talks begin, the possibility of a Tory leadership challenge and the emergence of a more radical left wing Labour Party are not helpful. It is possible that this result eventually makes Britain cede more ground in the negotiations on issues like immigration, but the euro-skeptic wing of the Tory Party remains strong.
Starting the negotiations in an environment of chaos is not good, so it means that the EU’s sequencing of negotiations – i.e. Brexit fee discussion first – will hold. It might also make for a more pragmatic approach so it takes us back towards the Norwegian model.
The next step is that Theresa May, should she remain PM, will try to form a government most likely with the support of the DUP. If she fails, it is possible that Jeremy Corbyn will try to patch together a coalition of Labour and smaller parties, though I think many will not see this as a workable solution (a Corbyn government would be a clear negative for UK assets). It is not impossible that another election follows in the next few months.
From a market’s point of view, I see several factors emerging. In general, the market risks will center on the UK. The GBP will act as the shock absorber, though should it dip into the low 1.20s, it would begin to look attractive (note that we recently closed our outperform stance on sterling). Gilts will remain firm on this uncertainty (though would sell off under a Corbyn government). We do not necessarily see stocks rallying in response to a fall in sterling because there is now much greater policy risk in terms of the outlook for tax, Brexit and investment (so, FTSE 250 to underperform FTSE 100). Real estate may also be volatile.
Broadly, the result may contribute to ‘risk-off’ at the margins in that it confirms the presence of angry societies (see our Supertrends framework) and has shown that the British people are prepared to vote for the relatively very left wing suite of policies in the form of Corbyn’s Labour Party. The fact that he has done relatively well may make some speculate that the tide is turning on issues like corporate tax (higher), the power of large corporates and the need to address inequality, so profits-negative, in a sense. Fiscally, the election result signals a desire to end austerity.
Finally, from a UK macro point of view, the result means that the Bank of England will have a more dovish bias. There is a risk that the uncertainty produced by this result leads to a fall in business and consumer confidence. (Credit Suisse/mc/ps)