Speculation is already rife that without a clear majority Theresa May will soon be forced to stand down as leader of the Conservative Party, casting doubt on the future Brexit negotiations.
The Conservatives secured 318 seats in the general election, making it the largest party but not giving it an overall majority.
It is understood Ms May will continue as prime minister and try to form a government with the Democratic Unionist Party of Northern Ireland.
However views are already filtering out from some quarters in financial services that May’s days are numbered, and that Brexit negotiations – due to start in just ten days – will be led be whoever takes over the helm, currently an unknown quantity.
The BlackRock Investment Institute sees a Conservative leadership race as likely at some point unless a new election is called.
It also flagged other concerns.
“A minority government may be hostage to eurosceptics and others hostile to making concessions to the EU. But we also now see a wider range of potential outcomes, including a softer Brexit in light of parliament’s new makeup,” the world’s Institute backed by biggest fund manager said in a statement.
“We see bigger risks of an economically disruptive “no deal” Brexit – one that leaves the UK without existing trade or security agreements by the hard 30 March 2019 deadline.
“The pound should remain a good barometer of Brexit risks, we believe.
“The EU is willing to do a deal, we believe, but wants to draw a clear line between the benefits and responsibilities of members versus non-members. The EU has other priorities.
“New French President Emmanuel Macron looks poised to build on his win with a parliamentary majority that may make it easier to pass business-friendly reforms. Macron and German Chancellor Angela Merkel are leading a revived drive to reform the EU, a bigger priority than spending energy haggling over Brexit terms.”
Charles Hepworth, investment director at GAM, said the future of Brexit talks look “undeniably shaky”.
“The leadership of the Conservative party could be tested again and another election could be pursued later this year.
“This injects huge uncertainty into markets and will lead to volatility. In our view, this is the worst possible outcome for the markets in the short term.”
John Wyn-Evans, head of investment strategy at Investec Wealth and Investment, said the government does not appear to be in a strong position.
“There are strong calls for the prime minister’s resignation, and not just from outside the party. This raises the biggest point of future uncertainty. Will she go? And if she does, will the party go for a hard or soft Brexit prime minister?
“Until this is resolved it is difficult to make further strong asset allocation decisions. However, ongoing uncertainty potentially leaves sterling under some pressure. It is certainly hard to see it rallying strongly.
“The next big question is whether or not we have another election. That would again delay the Brexit negotiations, and potentially open the door further to the Labour Party who have the strongest momentum at the moment.
“There is though one technicality to consider, and that is an argument to try to hold on until October 2018, when constituency boundary changes take effect. These are estimated to bolster the Tory presence by a net 25-30 seats. So the Tories could try to hobble on until then.
“We are not minded to make any changes to our risk position or tactical asset allocation today in light of what we currently know and the markets’ initial reaction.”
laura.miller@ft.com
