Election 2017  

What a hung parliament means for markets

What a hung parliament means for markets

The UK is facing the prospect of a hung parliament this morning – and your clients face a pound taking the strain and markets repricing to reflect this result.

As this article was published at 7.20am this morning (9 June), it was impossible for the Conservative government to get the 326 majority they needed but they will be the party with the most seats in the House of Commons. 

Going into the general election markets had rather lazily been relying upon the opinion polls which continued to point to a Conservative win.

This unexpected development is likely to create some short-term volatility in stock, bond and particularly currency markets.

Dominic Rossi, global chief investment officer of Fidelity International, said this is the result markets feared. 

He said: “Markets were wrongly positioned, and international confidence in the UK will suffer. Sterling is the first casualty.

“The uncertainty will put a lid on the UK equity market. The prospect of another election within next few months, coupled with the Brexit negotiations which are more unpredictable than before, raises the risks for all investors in UK equities.”

Howard Cunningham, fixed income portfolio manager at Newton Investment Management, said a hung parliament is likely to generate a larger market reaction, as it is not the scenario priced in currently. 

He said: “It would cause more uncertainty, which is likely to be sterling negative. Gilts may initially benefit from a flight to quality (in the context of UK assets and UK investors).  

“With the likelihood of a Conservative-led government, some extra public expenditure commitments at least might be necessary to persuade another party to be the minority partner in government, putting some upward pressure on gilt yields and gilt issuance. 

“Furthermore, a less stable coalition government would lead investors to demand a higher risk premium, so gilt curves should steepen.

“If a Labour-led coalition appeared likely, gilt yields would almost certainly head higher, as higher public spending would engender higher gilt issuance, and faster increases in minimum, living, and public sector wages would suggest higher inflation (both of these are bad for bonds). 

“Index-linked gilts could be expected to outperform conventional gilts, but could still produce losses for investors.”

The markets have already been able to express a view on the hung Parliament result overnight by trading sterling overnight in Asia and the pound has lost around 1.5 per cent against the dollar, falling to around the $1.2750 mark, retracing some of its recent gains.

In some respects, Russ Mould, investment director at AJ Bell, said that could have been a lot worse and that may reflect the electorate’s clear rejection of Prime Minister Theresa May’s so-called Hard Brexit stance.

He said: “We are likely to see some initial market volatility today but once that has calmed down, hopes for a softer, less combative approach may help the pound and also the UK stock market in the face of the uncertainty which the election result throws at investors.