Davy Private Clients Insights

Insights

Getty_464426192_Houses_Parliament_62xpx.png
Investing Insights June 2017

UK Election: Hung Parliament

brian-o-reilly.jpg Brian O'Reilly
Head of Global Investment Strategy

The UK election has ended in a hung parliament. The latest projections have the Conservative party winning 318 seats of the 650 seats in parliament. This is 13 less than they had prior to the election and 8 seats short of what was needed for a majority (326).

The big gains were made by Labour, winning 29 more seats which gives them 261 seats in the House of Commons. The Liberal Democrats gained 5 seats which puts them on 13, while the Scottish National Party (SNP) was the biggest loser down 21 seats which puts them on 35.

Perhaps the biggest winner of all was the Democratic Unionist Party (DUP) which gained 2 seats, bringing them to 10. This potentially gives them a critical role in supporting the Conservatives, although they are not likely to form a formal coalition. From an Irish perspective this is potentially good news, as it could mean the DUP would push for a softer Brexit and no hard border with the Republic.
 

Figure 1: UK Election results

Number of seats won by each party as at 9th June 2017, total = 649*





*649 of the 650 seats have been declared

Source: BBC

 

Market reaction

So far there has been a benign reaction to the result in the market. The biggest impact has been in the currency markets. Sterling (GBP) is roughly 1.5% lower against the euro and down 2% against the dollar. As we saw following Brexit, this is helping to push the FTSE 100 higher (+0.7%) as it makes multinationals more competitive, while the more domestically focused FTSE 250 is down (-0.7%). Gilt yields have risen from 0.9% to 1%. Interestingly the Eurostoxx is also higher (+0.5%).
 

Political gridlock

Clearly there are a lot of questions that need to be answered, but at this point the only certainty is that there is a period of heightened uncertainty ahead. In the event of a hung parliament the incumbent prime minister is usually entitled to attempt to form a government. However, given Theresa May’s sizeable lead heading into the election there are already calls for her to resign.

Aside from holding another election, at this stage is appears that the only option is for the Conservatives to form a coalition. There is no official time limit to form a coalition but it took five days to put the coalition together in 2010.

It appears that the DUP have already agreed to ‘support’ the Conservatives in minority government, although details of a coalition have not been announced.

 

Labour coalition options

If the Conservatives fail to form a coalition it will be up to Labour to try and form a government. The arithmetic is complicated as even a Labour/Liberal coalition falls well short of the 326 seats needed to form a majority. Potentially they could join forces with the SNP or alternatively try to form a rainbow coalition with the Liberals, the SNP and the DUP.

In the event of no coalition being formed, both the Conservatives and Labour could opt to try to run a minority government but the most likely outcome is that there will be another election later this year. This clearly puts Brexit negotiations in doubt and again leads to a period of uncertainty and volatility for sterling and other GBP assets.  
 

Economic impact

We think this result intensifies the downside risks to the near term economic outlook for the UK. Such significant political uncertainty will further dampen sentiment and confidence, exacerbating the weakness we have already started to see over recent months.

A hung parliament increases domestic uncertainty and clearly complicates the UK's position at the upcoming EU negotiations. EU Budget Commissioner Günther Oettinger has said that he was unsure whether Brexit talks could start later this month as scheduled. Although this election result could potentially raise the possibility of another Brexit referendum, we think this is a low probability outcome.

The reality facing the UK is they are still left with a weakening economy. True the immediate shock from the Brexit referendum was not as serious as had been expected, but most economic indicators have been moving down since the start of the year. Consumer and business confidence is being negatively impacted, inflation is rising, property prices are falling and all this is taking its toll on UK consumers. A hung parliament will not help this situation.

 

WARNING: Past performance is not a reliable guide to future performance. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment. Returns on investments may increase or decrease as a result of currency fluctuations.
WARNING: Forecasts are not a reliable indicator of future performance.

 

 

HIDE V
SHOW /\