June 12, 2017—On June 8th, the UK held general elections. The ruling Conservatives won more seats in the House of Commons than any other party, but fell short of retaining their governing majority. As a result, the Conservatives had to join up with a small regional northern Irish political party to form a coalition government. Conservative Party leader Theresa May will continue as Prime Minister—at least for now.

  • Brexit was the principal issue in the general election. Prime Minister May had called the elections in order to strengthen her negotiating mandate with respect to upcoming Brexit negotiations with the EU. Her failure to achieve a strengthened mandate is an echo of the failure of her predecessor, David Cameron, to secure a “Remain” vote in the Brexit referendum.
  • The good showing by Labour and the Liberal Democrats suggests that there is a shift in popular views toward the Brexit negotiations. Both opposition parties favor a greater willingness by UK negotiators to engage in give-and-take with EU negotiators. 
  • Nevertheless, it is the Conservatives who, with the support of like-minded Democratic Unionists, will continue in power. The Conservatives will no doubt take note of the shift in sentiment, and perhaps be willing to modify some hardline Brexit positions. However, we do not believe the government will bend on core issues such as UK control over immigration and justice. Because the EU has already signaled it is not likely to accept UK terms on immigration and justice, the prospects of a complete break with the EU continue to remain high. Markets have already priced in the likelihood of a “hard Brexit.”
  • The Scottish nationalists lost a large number of seats to both Labour and the Conservatives. This reduces the likelihood of a second Scottish independence referendum. The Scots had voted overwhelmingly to remain in the EU, in the Brexit referendum. Consequently, there was some fear they would vote for independence, so that they could then rejoin the EU as an independent country. Now that prospect seems much less likely, and so a potential Brexit complication is removed.
  • Apart from Brexit, we also believe that the election results signal a growing popular concern about the economic divide in the UK—which generally pits a highly prosperous greater London against the rest of the nation. To many voters, Prime Minister May seems less compassionate with respect to social and economic issues than her predecessor David Cameron or hard-left Labour leader Jeremy Corbyn. The Conservatives are no doubt concerned about the large gains made by Labour. As a result, we think there is a high probability that May’s fellow Conservatives will replace her later this year with someone like Cameron, who may be willing to launch greater fiscal spending.
  • Any coalition government is inherently subject to strains among partners. If the Democratic Unionists were able to pull out of the coalition, there would be a new election. If by then Labour is stronger than the Conservatives, it is possible that the new prime minister could be Jeremy Corbyn, the hard-left Labour Party firebrand. But that prospect is still low.

Core narrative

We have an overweight to international developed equities. The UK elections do not fundamentally change our views. For one thing, there is no major change in the UK government or its policies, as would be the case if Jeremy Corbyn had become Prime Minister. Second, the UK equity market has already priced in a “hard Brexit,” so if there is a prospect of anything softer, that would support equities. Third, apart from the London-based financial sector, the UK stock market is dominated by energy and materials companies, which are much more impacted by oil and commodity prices than by UK political or economic developments.  

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