Election 2017  

Don’t panic – hung parliaments don’t do long term damage

Don’t panic – hung parliaments don’t do long term damage

Advisers battling through the apocalyptic hyperbole of some commentators today are being reminded that past hung parliaments have had little long-term economic or market impact.

As Britain wakes up to the news Theresa May’s Conservative Party has failed to convince the electorate it is “strong and stable” enough to secure the number of seats needed for an overall majority, some financial services public relations machines have gone into meltdown, practically predicting a bloodbath for investors as a result.

But Ed Smith, asset allocation strategist at Rathbones, has suggested calm.

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“Only two general elections have resulted in a hung parliament since the Second World War. The first was in February 1974 and the second in May 2010,” he pointed out.

“February 1974 does not offer a paradigm relevant to today. The economy was mired in crisis: an oil shock had sent prices spiralling upwards, and the introduction of the three-day working week in December 1973 made the recession considerably deeper. 


“[By contrast] 2010 offers a more appropriate case study, although the economy was on much shakier ground than today. The hung parliament only lasted 6 days before a Conservative-Liberal Democrat coalition was cemented. 

“The pound fell 2 per cent against the US dollar the day after the polls closed, and continued to fall a further 2 per cent even after the Liberal Democrats announced their approval of the coalition deal. 

“After two months, the pound was back above its initial level. That reaction was rather a subdued one, and indeed followed the pattern typical after all general elections.”


As the news started to come in that the UK would have hung parliament, the pound fell around 2 per cent against the dollar.

At 9.45 am it had pared some its early losses to be down around 0.79 per cent at $1.27 to the pound.

Smith admitted sterling is vulnerable, but said other asset classes should remain largely unaffected.

“Although our research has found no evidence that any general election since 1964 diverted the economy from its existing course, Brexit means much more is at stake for the economy this time. 

“This makes the exchange rate reaction particularly hard to gauge. In early trading the pound has fallen 2 per cent against the dollar and 2 per cent against the euro. 

“From here, political disarray could lead investors to lose confidence and withdraw funds; or investors may assume that European negotiators will capitalise on the UK’s weakness, play hardball and so raise the risk of a ‘hard’ Brexit, to which the pound would react poorly.


“Of course, the loss of Conservative seats could also be interpreted as a vote against Brexit, and if investors raise their estimated probability of a soft Brexit as a result the pound may benefit.”

He added his view that the pound remains very undervalued relative to economic fundamentals, though noted it had already lost some medium term support from interest rate differentials and a reversal of short positioning before the election.


Other asset classes, he said, are “rarely affected” by general elections, even when the election outcome was not clear before polling day.