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.
“Any talk of a softer Brexit could help financial services stocks and banks, while any marked pound weakness could put the spotlight back on those overseas plays, exporters and dollar earners who did well in the wake of the European Union referendum result but have lagged the FTSE All-Share’s more recent advances – the miners, the oils and US-exposed names like Ashtead and Wolseley.”
In the very short term, experts agreed the identity of the next prime minister and the parties who could form any Coalition will go a long way to shaping sentiment, in addition to the rate at which any Brexit negotiations are concluded.
Lessons from 2010
Back in 2010, the FTSE 100 fell 2.6 per cent on the day after the election on 6 May of that year threw up a hung Parliament.
The index then rallied 5.2 per cent on the following Monday, when incumbent Prime Minister Gordon Brown resigned and overall recorded a gain of 2.3 per cent from the day before the ballot to the announcement of the Conservative-Liberal Democrat coalition on 12 May.
In contrast, the UK Government bond (or Gilt) market wobbled a little, as the yield on the benchmark 10-year Gilt rose to 3.78 per cent from 3.74 per cent and prices therefore fell slightly.
Sterling lost between 1.5 per cent and 2 per cent against the dollar and euro on 7 May 2010 as the hung result became clear but losses came to barely 0.5 per cent on each count by the time former Prime Minister David Cameron and Nick Clegg had cobbled together their coalition.
AJ Bell’s Mr Mould said: “The scope for short-term swings is clear – but note that markets calmed down pretty quickly as economic and company fundamentals reasserted themselves.”
Over the 12 months following the 2010 Election, the FTSE rose 13.6 per cent while the 10-year Gilt yield fell (so price rose) from 3.74 per cent to 3.4 per cent, helped by the Bank of England’s quantitative easing bond-buying programme.
The pound gained 10 per cent on the dollar and lost 4 per cent against the euro in the 12 months after the poll.
Mr Mould said: “This was as much due to the fundamental backdrop: a recovery from the financial crisis and ultra-loose monetary policy from central banks the world over, in the form of falling (or record-low) interest rates and QE.
“UK politics, next to that lot, meant relatively little.”
emma.hughes@ft.com
