UK General Election - June 2017 - Result Update.

What Happens Next?

Theresa May’s political gamble hasn’t paid off. She called the snap election with the aim of increasing her majority, to provide the Conservatives with a “strong and stable” mandate to proceed with Brexit negotiations. The electorate voted otherwise. The Conservatives did increase their share of the vote, coming in at 43% which was in line with the opinion polls. Labour also had a strong night, receiving over 40% of the vote, which was higher than polls had predicted. Both parties increased their vote at the expense of UKIP, the SNP and the Liberal Democrats. However, for the Conservatives, this resulted in a reduction in the number of MPs and ultimately the loss of their majority.

With almost all the results declared, it looks as if the Conservatives will have 318 MPs, which is just short of the number required for an overall majority. We now have a hung Parliament. So, what happens next? The Conservatives are still the largest party and could govern as a minority government, which could leave them vulnerable and make it difficult to implement legislation. More likely is that they could make a deal with the Democratic Unionist Party (DUP) from Northern Ireland, as their additional 10 seats could give the Conservatives a slender majority. However, there would likely be concessions to be made to secure the DUP’s support.

Mathematically, it is still possible for the Labour Party to form a minority government. It would take a substantial amount of co-ordination and seems unlikely as all other parties ruled out such a coalition before the result. Sinn Fein do not take up their seats in Parliament so their 7 MPs can effectively be discounted from any “progressive alliance”.

This election result has ultimately created more uncertainty for the UK. It could take days before we know the shape of the new UK government, whether it is a Conservative minority, Conservatives with DUP support or “progressive alliance” under Labour. Theresa May’s position as Conservative leader also now appears untenable after losing an election that she didn’t have to call, particularly since the poor result is being attributed to her performance during the campaign. There is already speculation about who would take over from Mrs May, should she resign, with Boris Johnson, Amber Rudd and David Davis being the early favourites to take over. Although she may try to stay on as leader, at least in the short term.

Of course, all this means that the UK is in a weaker position over Brexit. The negotiations were due to start in the next couple of days. However, they may now be delayed until the new government is in place. This puts pressure on the two-year timescale between triggering Article 50 and leaving the EU. It makes Brexit negotiations that much harder if the UK government could be beholden to coalition partners or factions within parties. This was the very thing that Theresa May wanted to avoid with the election, and the result has now made this situation more difficult for the UK.

Initial market reaction was similar to that of the Brexit vote and as expected for the increased uncertainty following a hung Parliament. Sterling sold off over 2% and is trading around 1.27 versus the US dollar, which is where it was in mid-April when Mrs May called the snap election. This has boosted UK large cap names (currently up over 0.5%) which get a substantial part of their revenues in currencies other than GBP, and has pushed down the more domestically focused small and mid-cap names (currently down about 1%). Our portfolios have been positioned to deal with these sort of risks, particularly currency volatility. Consequently, despite the political drama unfolding, we believe our portfolios remain appropriately positioned, a situation we shall continue to review.