UK general election: Pound drops, yet FTSE rallies amid shock hung parliament

The pound has plunged, but the FTSE has rallied, following the result of the UK general election which yielded another unexpected result of a hung parliament. 

With further financial market volatility on the horizon, asset managers have been sharing their view on Theresa May’s disastrous election campaign that was designed to bring her a greater majority, yet resulted in a hung parliament result.

Now with the Conservatives now relying on Northern Ireland’s Democratic Unionist Party (DUP) for its support to create a government and many calling for Theresa May to resign, rather than the stability she hoped for, more uncertainty has been created around Brexit.

Various EU officials have spoken out earlier today, predicting a delay to the Brexit, talks amid such UK government instability.

Sterling’s value dropped overnight and stood 2% lower at about US$1.27 as trading began. Against the Euro it dropped by 1.7% at 1.1350. Yet, shares were higher with the benchmark FTSE 100 index up at 0.9% at 7,515.31 this morning.

INDUSTRY REACTION

The financial services industry has reacted with shock at the result, with many asset managers factoring in an increased Theresa May majority into their portfolios.

David Zahn, head of European Fixed Income at Franklin Templeton Fixed Income Group, noted that May’s gamble didn’t pay off.

“She had hoped that a resounding election victory and an increased majority in the House of Commons would give her a mandate to pursue her own political agenda and, in particular, strengthen her hand in negotiations to secure the United Kingdom’s withdrawal from the European Union (EU).

“But those plans are in tatters and instead, slightly less than a year after the country voted to leave the EU, the United Kingdom has been plunged into further political uncertainty.

“We expect the pound to plummet and gilt yields to decline as investors embark on a so-called flight to safety. Overall, we think so-called risky assets, such as equities, are likely to underperform.”

SURPRISE RESULT

Richard Colwell, head of UK Equities at Columbia Threadneedle Investments, highlighted that the UK election result “is not what the market expected”, with the contradictory situation of Labour leader Jeremy Corbyn, (pictured left), seen as as a ‘winner’ despite Labour finishing second in the race to 10 Downing Street, with 261 seats.

Conservative leader Theresa May has been seen as a ‘loser’ due to the Conservatives failing to win enough seats to form a majority government, yet the party ‘won’ the most seats with 318, eight short of the 326 needed to form government.

It has been announced that May, (pictured below left), has support of the Northern Ireland’ Democratic Union Party (DUP), which has just ten seats and will aim to join together and form a government together with the slimmest of majorities between them. This is likely to be just three MPs, with one seat left to call, but will see the DUP able to have a greater influence on UK politics than it could have ever expected.

Indeed DUP leader Arlene Foster earlier today said that she expressed doubts that Theresa May can “survive”.

Labour had also said that it is willing to form a minority party government as it believes that it can gain support for its policies across other parties without forming a coalition, although this scenario is unlikely.

What is likely is that a general period of further instability will commence with a possible further general election with the next six months, general seen a s a disaster for Brexit negotiations and financial stability.

Colwell noted that the initial market reaction post the EU referendum and US election proved short-lived.

“A number of stocks that could be vulnerable under a more interventionist government have been weak for some time (eg transport and utilities), so this isn’t coming from a clear blue sky.

“Any sell-off in media and leisure stocks could prompt takeovers. However, if pressure on sterling continues and the currency returns to the lower end of its recent trading range, dollar earnings for multi-nationals listed in the UK will be boosted. Remember the UK stock market is much less reliant on the domestic economy than in previous cycles.”

NO MANDATE FOR HARD BREXIT

Robeco’s chief economist Léon Cornelissen noted that the narrative of May needing a landslide victory to create the maximum room for manoeuver to negotiate the Brexit “has dramatically failed”.

“During the campaign she was pushing for a hard Brexit, especially detailed plans on reigning in immigration, and a lot of nonsense that no deal with the EU would be better than a bad deal, and clearly there is no mandate for it.”

“But this doesn’t make the Brexit negotiations any easier. With a hung parliament it’s difficult to see how they’ll be able to make an upfront deal on the up to £100bn of divorce payments that are being demanded by the EU. What’s most likely now is a coalition between the Conservative and the Ulster Unionists, but it would be an unworkable razor-thin majority. So a collapse of the government is likely, with perhaps new elections in October.”

DEPRECIATED STERLING

Saker Nusseibeh, chief executive at Hermes said sterling is expected to come down as “markets abhor both the unexpected and uncertain”.

For Bill Street, head of investment for EMEA at State Street Global Advisors, sterling is already “substantially undervalued” against the dollar and euro, reflecting future uncertainties.

Pioneer Investments’ head of Global Asset Allocation Research, Monica Defend, noted that, since the referendum, the pound has experienced a sharp depreciation, but it has recovered some ground as markets started to discount the possibility of a “soft Brexit” and on the back of economic resilience in the UK.

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

Read more from Gary Robinson

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