News and Insights

UK election shock casts Brexit doubts

The surprise hung parliament vote in the UK election weakens the government and could hold significant implications for future Brexit negotiations. Here, experts from BNY Mellon Investment Management boutiques1 consider the likely impacts.

The first election since the UK voted to leave the European Union (EU) has resulted in an inconclusive hung parliament which could have a significant bearing on the UK’s negotiations over EU withdrawal itself. While Prime Minister Theresa May, whose UK Conservative party initiated last year’s EU referendum, had stated “no deal is better than a bad deal”2 the future shape of the government, Brexit negotiating team and road ahead now appear in some doubt.

With the eurozone showing growing signs of recovery, investment managers have been closely following the latest election to consider its likely market and economic impacts at home and abroad.

According to Newton global equity portfolio manager Paul Markham: “Sterling has remained weak on uncertainty; but there is a wide differential this morning between performance of the export-led FTSE100 – of which the constituents are approximately two-thirds exposed to overseas end markets, meaning a weak pound is seen as positive for them – and the much more domestically-sensitive FTSE250, which is down.

“As expected, banks and domestic cyclicals are underperforming. Perhaps surprisingly, utilities are keeping pace with the wider market. It may be that investors see a lower chance of price capping as this was seen as a Theresa May policy and less easy to enact as a minority government.”

Assessing likely market impacts post the election, Alcentra global chief investment officer Paul Hatfield adds: “The hung parliament is likely to exacerbate the difficulties of the already fraught Brexit negotiations and the ensuing uncertainty won't be good for markets. With policy unclear and real changes likely to be hard to achieve, I expect markets to drift slowly down while sterling will move in line with news flow on views of the likely outcome of trade negotiations.”

Standish sovereign analyst Rowena Geraghty agrees that, despite the election’s surprise outcome, a continued path to Brexit looks likely. “We recognise the tail risks of a hung parliament but note that the UK will most likely still exit the EU in this scenario,  albeit potentially after a second referendum and depending on the shape of the future government.” she says.

The road ahead

From a longer term European political perspective, Newton leader of fixed income Paul Brain believes that while major economic upheaval is unlikely the surprise election outcome could trigger a period of marked uncertainty.

“The possibility of a leadership challenge and also another election cannot be ruled out, thereby prolonging the uncertainty. There is likely to be less austerity, as the conservatives will not be able to get any further cuts in spending through. The gilt market won't like that and yields could rise.

A decline in sterling is likely although fighting against that trend is the fact it is relatively cheap and also there could be a mistaken belief that we may get a softer approach to the Brexit negotiations.”

Newton strategist Brendan Mulhern agrees and also sees potential risks for the UK currency ahead. “A weak UK government could weigh on sentiment towards the UK economy, as the prospect of a minority UK government having to battle on two fronts; domestically and with the EU negotiators, hardly give investors reason to expect decisive governance.

“The prospect of yet another election only further muddies the waters. However given the momentum is firmly with Labour. The Conservatives may seek to govern without a majority in loose coalition with the Democratic Unionist Party (DUP); hardly the strong and stable leadership Mrs May campaigned on. Assets sensitive to the UK economy could also fall out of favour, including sterling and this might, in turn, translate into continued pressure on inflation, further weighing on real wages.”

Newton investment leader, UK equities, Christopher Metcalfe adds that, either way, many external uncertainties remain and could serve to cloud the wider economic picture at home, in Europe and beyond.

“We feel that there are many deflationary forces around the world such as too much debt, an ageing population and rapid technological change. Therefore we expect economic growth to remain subdued,” he adds.

  1. 1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
  2. 2 Guardian. Brexit: May’s threat to Europe: 'no deal for Britain is better than a bad deal'. 18 January 2017.

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