UK Election: Brexit, policy and markets

Image of Big Ben with British flag waving in the foreground on the day of the UK General Election 2017.

Investing

Gareth Trainor

9th June 2017 at 6:06am

Although we’re still waiting for results from a few seats, the UK general election produced a hung parliament, with no single party gaining a majority of seats.

We asked the experts at Standard Life Investments for their initial views.

“The Conservative Party has fallen short of retaining its majority by a handful of seats, but is likely to be able to form a government supported either formally or informally by the Democratic Unionist Party (DUP), which supported leaving the European Union. It is not yet clear whether Theresa May will lead this government.

UK election produces a hung parliament

Brexit outlook

The lack of an outright Conservative majority increases uncertainty about the path of Brexit negotiations. Not only will it give more voice to disparate views within the Conservative Party, but the position of the DUP as well as the other major parties will have to be incorporated in the negotiation process in order to pass exit legislation. Although the result increases uncertainty about the Brexit process, this need for compromise could push the government towards a more conciliatory approach to negotiations.

Government policy outlook

In terms of government policy, the Conservative manifesto was noticeably light on detail, giving the party some flexibility during the parliament, though their fragile position will make legislating more difficult. The manifesto still emphasised tightening fiscal settings, albeit more slowly than previously promised. However, the need for broader support to pass legislation could create incentives to relax austerity even further.

Need for compromise could result in more conciliatory approach to Brexit negotiations

The Conservatives still prefer lower taxes, but have dropped a promise not to raise them. Expenditure commitments were vague, although the detail suggests only moderate shifts from previous plans. The manifesto outlines only small changes to UK product and labour markets, likely leaving them among the most lightly regulated of the countries in the Organisation for Economic Co-operation and Development (OECD). However, there are areas where the Conservatives have promised to become more interventionist, such as industrial policy, energy policy and minimum wages.

Market implications

Initially we expect risk markets to stumble – sterling has already pushed a little lower as nerves build around potentially bumpy Brexit negotiations. On the back of these concerns, credit spreads are likely to widen slightly, and domestic equities and real estate investment trusts (REITs) to underperform.

Gilts are likely to strengthen, with market perception focusing on a more difficult Brexit negotiation process for a weakened government. Longer term, the market is likely to be more sensitive to how the eventual government affects policy and decision-making through the parliament.

We’ll keep you updated on the latest views from the investment strategists at Standard Life Investments on what’s happening. Also look out for the monthly market views from Andrew Milligan, Head of Global Strategy at Standard Life Investments.

And remember that having a well-diversified portfolio, where your money is spread across a variety of investments from different parts of the world, can help you achieve the right balance between risk and return, whatever’s happening in politics, the economy and markets.

Content in this section is provided by Standard Life Investments. The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in.