U.K. Election: Another Step Up In Political Risk

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Includes: DBUK, DXPS, EWU, FKU, HEWU, QGBR
by: Edison Investment Research

A tactical blunder does not mean the end of Brexit or the Conservative administration.

UK PM Theresa May's strategy of consolidating power when the Labour opposition was seemingly in disarray and the Conservative poll lead unassailable has seriously backfired. The likelihood now is that the UK will be governed by a minority Conservative administration with support from the Democratic Unionist Party (DUP). May's future as leader of the Conservative party remains in serious doubt following a number of campaign mistakes, not least the failure to recognise the importance of appeasing the older voter. Much now remains open for debate over the next few weeks.

However, the implications for investors are more limited, provided a new Conservative government can be established. Before the election, May's slender overall majority placed her at risk of rebellion from hardline anti-EU MPs. The new reality that the administration depends on continuing DUP support is likely over time to push the negotiating position towards the middle of the road, reflecting DUP support for a soft Brexit. Importantly however, bumps in the road will be harder to deal with in an administration overloaded with competing views.

Therefore for investors, the result is an unhelpful addition to political risk. Both businesses and markets can thrive in a variety of political scenarios but uncertainty is the enemy of new investment. The modest fall in sterling this morning and rise in gilt yields is a warning shot by markets, reflecting an increased risk premium for UK assets. There is something of an irony that in a digital world of big data and sophisticated media analysis, political trends appear to be becoming increasingly unpredictable.