UK Conservative Party loses majority

The UK's ruling Conservative Party looks to have fallen just short of a parliamentary majority, based on a BBC forecast at the time of writing, with around 90% of seats counted. This sends the UK into a period of political uncertainty at a time when Brexit negotiations are about to begin. We believe the Conservatives are ultimately likely to be able to form a minority government, but they have been severely weakened by the vote. The government has moved from 330 seats (a small majority) to around 316 seats, a minority, based on the latest forecast. In Asian trading, the British pound has dropped around 1.5% against the US dollar. But global equity markets have so far been unharmed by the vote, with the Nikkei up 0.9%, UK equity futures down -0.2%, and US equity futures up 0.1%.

The unexpected outcome increases the threat of further volatility for sterling and UK assets.

The unexpected outcome increases the threat of further volatility for sterling and UK assets. The result is likely to call the position of the Prime Minister into question, the government is likely to be relatively weak, and the result further complicates the upcoming Brexit negotiations, due to start on June 19. A tighter political balance could make it easier for Eurosceptics within the Conservative Party and potential partners to prevent the government from offering the compromises needed to secure a trade deal. Brexit talks are now likely to be even more unsettling for markets, and the prospect of another election raises the risk of a delay, potentially leaving the UK without a negotiated exit settlement. Although we believe the pound had already priced in much of "hard Brexit" risk before this vote, the currency will continue to experience volatility through the governmental and Brexit talks.

Meanwhile, we maintain our underweight in UK equities versus Eurozone stocks. Higher political uncertainty is likely to more than offset any benefit from a marginally weaker pound, and we expect the earnings of UK companies to slow relative to those of Eurozone companies.

We will continue to monitor events in the UK and other areas closely, and gauge their impact on global markets. For now—and the futures today are confirming our view-- the results of UK elections do not appear to be threatening the global growth story.

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