The results of the United Kingdom’s (UK) general election were a bit of a shock, as the ruling conservative party led by Prime Minister Theresa May lost its majority, winning only an estimated 318 seats in Parliament, versus a needed majority of 326 seats. The UK pound fell by nearly 2%.
Given the lack of a majority in Parliament, the Ivy Investments team believes that the conservative push for fiscal austerity is likely to be tempered. While this is positive from an economic perspective, we think the increase in uncertainty following the election is likely to put further downward pressure on economic activity. We expect further economic weakness ahead.
Nearly two months ago, May called this early election with the conservatives well ahead in the polls. Most thought the conservatives would see a large increase in its 17-seat majority. However, during the campaign, polls began to tighten and it looked as if the conservatives would only win a small majority. The polls were wrong once again, as they were preceding last summer’s Brexit vote.
May has stated the conservatives will partner with the Democratic Unionist Party (DUP), a right-wing party from Northern Ireland. The DUP won 10 seats so this coalition would only have a slim majority in Parliament, making it difficult to pass legislation. While May has stated she will stay on as PM, her weakened political state makes her position tenuous.
Regarding Brexit, May has been pushing for a tough stance on negotiations with the European Union (EU). However, the DUP has been critical of a “hard Brexit” as the flow of goods, services and people between Ireland and Northern Ireland is very important. Given the coalition’s small majority within Parliament, any vote on a Brexit deal will be contentious. Thus, a “hard Brexit” still cannot be ruled out.
The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
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