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The dust is starting to settle on this year’s General Election. Theresa May’s decision to go to the polls on June 8 backfired, with the Prime Minister losing her majority rather than extending it as she wished. That took us into hung parliament territory, with a sense of confusion about how the business of Government would be handled going forward.
Confusion and uncertainty are usually a cause for concern for the markets – and people in the UK with investments will have been frantically weighing up what this might mean for the fortunes of their stocks and shares.
Yet, while decisions at the ballot box might have had big political ramifications, might the impact on the markets end up being a lot smaller than you might expect? Here are some factors to consider…
Confidence and supply
While the result delivered a hung parliament, Theresa May has been able to stitch together a slim majority in the House of Commons thanks to a deal with Northern Ireland’s Democratic Unionist Party. Whatever the political merits of the deal, investors will note that this should mean that the Queen’s Speech, key finance measures such as the Budget and the legislation surrounding Brexit should get passed. While the scope is limited, the deal with the DUP does ensure that there is a functioning Government in the UK.
Hung parliament means Brexit
While Theresa May might have once declared ‘Brexit means Brexit’, investors might well feel assured that the election might well mean Brexit takes sole spotlight going forward. With a stripped down domestic agenda and large chunks of the Conservative manifesto put to one side, the Government will have fewer legislative distractions. Businesses and investors are keen to ensure that Brexit does not throw the UK economy off course and will welcome this narrower focus on an issue that really does have the power to change their fortunes.
The lack of legislative change might also provide breathing space for businesses and investors. As Hamish McRae wrote for the Independent, the Government lacks the strength to make sweeping structural changes to the economy or bring in a raft of new policies. The chance to assimilate legislation from the last few years might well encourage calm and should mean that there are no drastic changes to react to in the short term.
A functioning Government which takes the challenge of Brexit seriously and shows a minimal desire to make big economic changes might, therefore, mean investors see little change in the short term. Indeed, we can easily overstate the role of political events in the markets. As Money Observer notes, the UK economy has grown since the shock of the EU Referendum and the US economy has risen during the start of the divisive Donald Trump’s presidency.
But, it’s worth a note of caution beyond the short term picture. Even with the support of the DUP, the Conservative Party has a perilously small majority and might run into difficulties if dissenters emerge within the party’s own ranks over the all important detail of the Brexit negotiations. The DUP deal is due to be reviewed in two years, which might also mark a potential bump in the road, while Jeremy Corbyn’s Labour Party will now be determined to do all it can to frustrate the Government.
All of that means a cloud of uncertainty looms large – and that investors should expect some turbulence at least as the UK shapes its future beyond the EU. If we’ve learned anything in the last couple of years when it comes to politics and economics, it’s to expect the unexpected.
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