Theresa May explained her to decision to call an early general election on 8 June on the basis that ‘division in Westminster will risk our ability to make a success of Brexit’, as ‘the decision facing the country will be all about leadership.’ Previously, Mrs May had ruled out an election before the end of the parliament in 2020.
However, a slim majority in the Commons with opposition both within and outside her party, as well as opposition in the House of Lords appear to have changed Mrs May’s mind. Recent opinion polls which give the Conservatives around a 20-percentage point lead over Labour may have also played a part, as Jeremy Corbyn has struggled to unite his party and gain traction with large sections of the electorate. Such a margin a victory would potentially be comparable with Margaret Thatcher in the 1983 landslide election. Since much attention in both France and Germany will be on domestic elections over the Summer, in practice an election in the UK need not necessarily delay Brexit negotiations.
The UK FTSE-100 index fell 180 points today to 7147, or nearly 2.5%, whilst the pound strengthened by 1.6% against the US dollar to 1.276 and rose by around 1% against the euro to £0.838. The rally in Sterling is based on a market view that the snap election could potentially delay or soften any Brexit deal. The fall in the FTSE-100 reflects the bounce in Sterling as the foreign earnings of Britain’s largest companies are squeezed, as well as the less favourable outlook for exporters with a stronger currency. The equity market uncertainty also reflects the political reality of at least two months of political turmoil in the UK.
The election raises doubts in all the main UK parties. As Mrs May puts together a new Conservative manifesto will it frame a ‘softer’ Brexit to accommodate the pro-Remain Conservative MPs in marginal seats? Will the election expose the divisions in the Labour party or help to unite it? Will Labour continue with a pro-Brexit stance or switch to a pro-EU position to pick up votes from Pro-Remain voters? How will the Lib-Dems fare with a pro-EU position? UKIP have a dilemma, whether to campaign to win seats or risk diluting a pro-Brexit Conservative vote. The future of the Union will also play out as the Scottish and Welsh parliaments are promised more devolution of power in a bid to keep the UK together whilst reducing the appeal of nationalists.
In terms of investment management, our view is that today’s news does not necessitate any immediate action. Our portfolios are well diversified and designed to cushion against volatility from unexpected political developments. Our approach is monitor developments closely, both in terms of the new political landscape and any likely economic impact, such as a change in the direction of Brexit or pace towards leaving the EU. In the meantime, our focus remains firmly on analysing companies and markets, since irrespective of any short-term market volatility it is their profits and cash flow which will ultimately drive markets and deliver investors profits.
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