When UK Prime Minister Theresa May unexpectedly called an early election few would have predicted the result of a hung parliament. But a month is a long time in politics. After several policy gaffes and successful campaigning from the Labour Party particularly among younger voters, the Conservative party have seen their majority slip away.
What is a hung parliament?
A hung parliament occurs when one party does not win enough seats in the general election to have a majority. Unless she chooses to resign, Theresa May will remain in place as Prime Minister until she and the various parties have decided how, and under whose leadership, a new government will be formed. This will involve negotiations between the key parties as they try and form a coalition.
The uncertainty around this is likely to bring some volatility to markets in the near term.
Hear from our experts - what is the impact for markets?
“A hung U.K. Parliament means uncertainty and markets do not like uncertainty. It also makes the negotiations around Brexit considerably more difficult. More difficult negotiations between the U.K. and EU could mean a weaker GBP Sterling, higher imported inflation in the U.K., lower consumer confidence and more business indecision. This is also likely to mean that the Bank of England will maintain official interest rates at very low levels.
Australian companies that operate in the U.K. will likely be negatively impacted by these conditions. This could negatively impact companies like Amcor, Brambles and Westfield, but also include other companies. Market sentiment could also be troubled by this increased complexity and uncertainty. It is important to note that these impacts are likely to be short term in nature for Australian companies and any significant share price declines could be viewed as long term buying opportunities in quality companies.”
Paul Taylor, Head of Australian Equities
“The market’s reaction has been quite predictable” Fidelity’s CIO Equities Dominic Rossi believes. In this short video, Tom Stevenson interviews Dominic on the market’s reaction to a hung UK Parliament and how investors can potentially position their portfolios.
Tom Stevenson, Investment Director
Dominic Rossi, CIO Equities
"A hung parliament is likely to be negative for sterling assets, with the currency likely to take the majority of the strain. While the domestically exposed FTSE 250 has performed well over the past year, fresh uncertainty and higher inflation eating into consumer spending are significant headwinds in the months ahead. Three months into the Article 50 timeline, it is now unclear who will conduct negotiations on behalf of the UK or even what those negotiating will aim to achieve. While negotiations are unlikely to begin in earnest before the German elections, this is not the backdrop that anyone will have wanted."
Eugene Philalithis, Portfolio Manager, Multi Asset
"A hung parliament sees the market trying to get to grips with two competing narratives. Firstly, the old truism ‘the market hates uncertainty’ is likely to trigger currency and market volatility as investors ponder the scale of compromise to be made between parties of whatever hue as they try to form a government. Secondly, assuming that the Scottish National Party or the Liberal Democrat Party plays a significant role in any coalition, a second Brexit referendum suddenly becomes a real possibility for the first time, making investors re-assess their assumptions about Britain and the EU. Overall, despite some inevitable volatility, the market is likely to wait and see what sort of government emerges from the hung parliament before deciding how to react."
Matthew Jennings, Investment Director, Equities
