General Election 2017 – Another Political Shock

General Election 2017 – Another Political Shock

“Risk comes from not knowing what you’re doing.” (Warren Buffett)After the unexpected EU Referendum result and election of Donald Trump as US President last year, we have become somewhat numb to political shocks, so the hung parliament and failure of the Conservative Party to win a majority losing twelve seats in last night’s election lost some of its impact.

Nevertheless for Theresa May to have chosen to call a general election with a lead of over 20% in the polls and to see it result in the need for a coalition partner to remain in power, the 2017 general election ranks as one of the biggest political shocks in modern British history.

Hung Parliament

With all but one seat declared, the Conservative Party has 318 seats and eight seats short of a majority, or four seats short of a working majority on the basis that the seven Irish nationalist Sinn Fein MPs do not traditionally vote on parliamentary legislation. Mrs May has announced that she intends to govern with the support of the ten seats held by Northern Ireland’s Democratic Unionist Party (DUP).

Mrs May’s position has undoubtedly been weakened, hardly ideal with Brexit negotiations due to begin with the EU in just two weeks’ time on 19 June. At least in reality, little progress is likely to be made on Brexit talks until after the German elections in September.

Muted Market Reaction

In terms of markets, the response to the election has been generally muted. Whilst sterling came under pressure last night during counting after the exit poll suggested renewed political uncertainty, it recovered to close above $1.27 by the end of today. UK gilts, which reflect investor confidence in the UK government and UK economy were trading within normal ranges, largely unchanged on the day.

The FTSE-100’s overseas earners, such as miners, oil and industrials, boosted by the weaker currency, helped the FTSE-100 index rise by approx 1% today, whilst the more domestically focused FTSE-250 recovered early losses to close up approx 0.1%. Laggards today tended to be domestic names such as banks, house builders, retailers and media companies.

Softer Brexit

Whilst it is impossible to predict politics and volatility cannot be ruled out, our view is that a softer Brexit now looks more likely, which should be economically positive for both the UK and Europe. The electorate did not endorse Mrs May’s uncompromising stance on Brexit and to ensure DUP support is likely to require compromises in this area. The DUP want an open border with Ireland, which would most likely require continued membership of the EU Customs Union. A more relaxed position towards immigration would be welcomed by businesses and help support future economic growth.

More Borrowing and Spending

In addition, the new government is likely to adopt a looser fiscal approach, in other words borrow more and spend more than in the Conservative manifesto and an end to austerity. The DUP are against many of the benefit cuts proposed by Mrs May, such as ending the triple lock on State pensions and means-testing winter fuel payments. The Labour Party as the largest opposition party is also likely to lobby hard for protecting and increasing State benefits. In terms of spending, the new government is almost certain to come under intense pressure from the opposition as well as the DUP to spend more on public services, such as the NHS, education and job creation and borrow to invest in infrastructure projects. Whilst it will be important for Mrs May to keep a tight rein on borrowing and spending to avoid the risk of inflation and a loss of investor confidence in the government’s stewardship of the UK economy, a more Keynesian approach could be positive for UK economic growth and help mitigate the risks of Brexit.

IndyRef2 Shelved

The Scottish Nationalist Party was battered by pro-union parties in the election, winning 35 of the 59 seats in Scotland, a loss of 21 seats and 13% of the vote. This appears to have made a second referendum on Scottish independence from the rest of the UK, ‘IndyRef2’, unlikely in the foreseeable future. Keeping the UK union intact is likely to be economically positive for all regions of the UK, as well as avoid additional difficulties with Brexit negotiations.

Electorate Divided

Despite performing significantly better than many commentators expected, markets should also be relieved that the Labour Party were defeated with 261 seats, only three seats more than it secured in the heavy defeat in 2010 under Gordon Brown. Just as the electorate rejected giving Mrs May a commanding mandate, it did not endorse Jeremy Corbyn’s socialist vision for Britain of high personal and corporate taxation, extravagant uncosted spending commitments, or re-nationalisation of utilities and the railways. This division in the electorate and its reflection in the make-up of the new parliament is a strength of British democracy tempering extreme politics, requiring compromise and moderation, as well as holding the executive to account.

In conclusion, whilst we continue to monitor developments closely, we do not see the need for significant changes to investment strategy. This article has focused on the UK, but the UK economy comprises only about 2.5% of global GDP. Accordingly, it is events outside the UK which will continue to drive investment returns, such as the future path of US interest rates and US economic growth, the rebalancing of the Chinese economy, the QE programme in the Eurozone, as well as geo-political tensions in the Middle East and North Korea.

Over the medium term, we see the UK as an attractive market for investors. The general election result should make Britain more business friendly if a closer accommodation is reached with the EU, allowing companies to recruit talented workers from outside the UK. In addition, the UK could prosper and remain competitive if the government takes appropriate measures to stimulate and support economic growth by investing in infrastructure and temper austerity to ensure social cohesion.

Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk