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The UK had an impromptu general election yesterday, called by the governing Conservative (Tory) Party a few weeks ago. While they had an outright majority leading up to the election, they seemingly wanted a greater majority and probably felt that the main opposition – Labour – was particularly vulnerable to losing further ground to them. The original motivation for the election appeared to be to secure a greater number of members of parliament for the Tories that would, in turn, create quicker and more effective decisions around Brexit. But, as you well know, this was yet another example of governments completely misreading the zeitgeist among the voting public. The snap election had the opposite effect: the Tories lost ground and no longer have an outright majority (although they did win most seats and votes), causing a hung parliament.
So, what are the implications for markets? If we cast our minds back to 2010, there was a similar scenario, where the Tories secured the largest number of seats and votes, but they did not have an outright majority. They then formed a coalition with the Lib Dems, which gave them a joint outright majority. The markets, at the time, were ambivalent to the news and continued their strong upward trajectory. There are countless other examples of recent surprise election results where markets shrugged their shoulders and continued on.
And, what if Theresa May resigns? Again, there is a precedent for this, when David Cameron resigned folliwing the unexpected Brexit vote. Markets were also ambivalent to this change in prime minister. There are also many other recent and unexpected changes to president and/or prime minister around the world and they have had almost no visible impact on markets. So, in our view, the governing party and even the prime minister do not appear to matter to markets. Therefore, change to overall political leadership is not something we think clients should be overly concerned about – from a market perspective.
However, the greater underlying aspect at play is Brexit, which is material to markets. But, because Article 50 has been triggered and negotiations are already priced in by markets (we have seen a strong fall in Sterling, for example), again we feel that clients should not overreact to this news. Sterling, in particular, is already weak and so any further falls may well be temporary.
Our outlook for markets remains the same as it was before this vote for reasons explained above. Some markets, like US equities seem expensive and we are slightly nervous of them going forward. This spills over into global equities, too, where the US is a large component. Other markets like European and the UK equities seem closer to longer term averages and this makes us more supportive of them. And, we remain nervous of developed market bonds because of the very low level of underlying yields. The election results have not altered these long term views.