UK election brings more uncertainty to financial markets

Theresa May’s attempt to increase the Conservative Party’s majority in the British parliament backfired spectacularly as Jeremy Corbyn’s Labour Party made gains. The pound is set for a roller coaster ride again as uncertainties abound about who will be the next British Prime Minister, what happens to Brexit, and whether there will have to be another UK election in the near term.

Downing street

The general election has thrown up a hung parliament and huge uncertainties that are set to last for days and weeks to come. Will Theresa May be able to stay on as leader of the Conservatives and will she be able to form some sort of government, possibly propped by unionists in Northern Ireland? How long will that last? Will there need to be a new election soon? What will happen to Brexit? Will it be delayed, and could it actually be reversed in the longer term?  

So many questions and uncertainties were added on top of what had already been uncertain times. The UK certainly does not have a ‘strong and stable’ government, and a ‘coalition of chaos’ looks likely in the short term no matter what the makeup of the alliance will be.  

It’s often said that markets hate uncertainty more than anything, and we’ve already seen big moves in sterling overnight. The pound’s drop, however, has already helped prop up equity markets, notably the FTSE 100 with its high proportion of international companies making major chunks of revenue outside the UK.

Sterling is likely to remain volatile in coming hours and days until the questions above are resolved in one way or another. There’s no doubt that the Bank of England (BoE) is further away than ever from starting to tighten monetary policy given what’s going on, and that’s a good job for GBP markets. There’s also the question of whether a so-called 'hard' Brexit is now off the cards, and maybe markets will be relieved if that proves to be the case.

But it’s not quite as clear cut as that. After Brexit, Donald Trump’s win, this UK election, and the French election, markets are getting very used to political turmoil and uncertainty, and we have seen them largely shrug off concerns to focus on the bigger picture.

While some UK equity sectors are likely to be more responsive to the election than others – banks, retailers and companies facing potential nationalisation under a theoretical Jeremy Corbyn’s government immediately spring to mind. However, the FTSE 100 is likely to continue to track global blue chip peers. Even though money could well flow out of UK assets for a time, and that could mean the FTSE underperforms its global peers, it’s likely we will see the blue chip index do its own thing as it did after Brexit.

The FTSE 250, which is much more domestically focused than the FTSE 100, could underperform the FTSE 100. In the immediate aftermath of the election, that has proved to be the case, with the mid-cap index declining as the blue chips advanced.

At this stage, uncertainty reigns politically, and markets are going to be volatile as a result.   

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