Experts are divided over whether the hung parliament delivered in yesterday’s General Election increases the risk of a hard Brexit, with its consequent risks to the UK economy in the short- to medium-term.
BlackRock argues that the recently announced Conservative/DUP coalition will be more likely to be held hostage to eurosceptics. But other analysts see the strong showing of the other parties, which backed a softer approach to Brexit, as likely to lead to a reduced risk of a ‘no deal’ departure from the EU.
A spokesperson for the BlackRock Investment Institute says: “We see a bigger risk of an economically disruptive “no deal“ Brexit but also a wider range of potential outcomes. We see the pound as a good barometer of Brexit risks.
“We see this as a mild short-term negative for UK domestic assets due to the uncertainty and prospect of a weak government vulnerable to losing votes in parliament. We expect the Bank of England to keep its accommodative policies in place to support the economy through the uncertain negotiation period, looking beyond any short-term inflation spikes unless price pressures become sticky.
“We see bigger risks of an economically disruptive “no deal” Brexit – one that leaves the UK without existing trade or security agreements by the hard March 30, 2019 deadline. A minority government may be hostage to eurosceptics and others hostile to making concessions to the EU. But we also now see a wider range of potential outcomes, including a softer Brexit in light of parliament’s new makeup.
“The EU is willing to do a deal, we believe, but wants to draw a clear line between the benefits and responsibilities of members versus non-members. The EU has other priorities. New French President Emmanuel Macron looks poised to build on his win with a parliamentary majority that may make it easier to pass business-friendly reforms. Macron and German Chancellor Angela Merkel are leading a revived drive to reform the EU, a bigger priority than spending energy haggling over Brexit terms.
“The big question is whether an outline agreement can be reached by the hard March 2019 deadline. The main two sticking points: the size of the UK’s exit bill – reported to be €60-100 billion – and a deal on citizens’ rights on both sides, including any ongoing role for the European Court of Justice. The EU wants to settle these issues before discussing any future relationship. The EU is likely to give the UK some time before beginning any formal discussions, originally scheduled for later this month. We believe the UK’s uncertain political outlook means the timetable for reaching an agreement is even more compressed, with the clock already ticking.”
Hargreaves Lansdown currency analyst Chris Saint says: “Uncertainty over the formation of the next government means sterling exchange rates will inevitably remain volatile in the days ahead as markets try to fathom how this could impact upcoming Brexit negotiations. However, the pound’s initial declines may have been tempered by hopes that any eventual deal which requires cross-party support might actually imply a ‘softer Brexit’ approach which could see the UK keep trade access to the EU single market for trade.”
GAM investment director Charles Hepworth says: “The future of Brexit talks, which were scheduled for 10 days’ time, looks undeniably shaky, the leadership of the Conservative party could be tested again and another election could be pursued later this year. This injects huge uncertainty into markets and will lead to volatility. In our view, this is the worst possible outcome for the markets in the short term.
“Sterling has already registered the effects of the first shock wave from the election result, falling over 2% from yesterday. This will buoy FTSE large caps with their foreign earnings but will be negatively translated into domestic earners as inflationary pressures will continue to build. Expecting the unexpected is now de facto and we continue to be positioned in non-sterling assets, which will benefit our portfolios in the short term.”
SYZ Asset Management head of European equities Mike Clements says: “On the one hand, Britain is in a weaker negotiating position than before, thanks to Mrs May’s failed attempt to increase her majority. On the other, the result increases the probability Britain will have to make greater compromises with the EU – i.e., more of a “soft” Brexit rather than a “hard” Brexit – which would reduce the chance of acute volatility. The tail risk for markets is if a negotiation impasse creates a political stand-off and subsequent market panic.”
Investec Wealth & Investment head of investment strategy John Wyn-Evans says: “The tail-risk of a Labour win, which might have been more negative, has been removed, at least for the time being. Furthermore, the prospect of a “hard” Brexit has possibly been reduced.
“The next big question is whether or not we have another election. That would again delay the Brexit negotiations, and potentially open the door further to the Labour Party who have the strongest momentum at the moment. There is though one technicality to consider, and that is an argument to try to hold on until October 2018, when constituency boundary changes take effect. These are estimated to bolster the Tory presence by a net 25-30 seats. So the Tories could try to hobble on until then.
“We are not minded to make any changes to our risk position or tactical asset allocation today in light of what we currently know and the markets’ initial reaction.”
JP Morgan Asset Management global market strategst David Stubbs says: “Everyone is trying to get a handle on the ramifications, there is a lot of heat and light, but it looks like the Conservatives although weakened severely will have a government, leaving us with a situation not unlike what we had before – a hard to model Brexit negotiation process and sterling significantly lower relative to recent years.
“The policy outlook is actually fairly stable in that the Labour party held onto strongholds and did that by saying they would proceed with Brexit. Even in the very unlikely outcome of a Labour minority government, it’s very unlikely that we would see a move to reverse the Brexit vote. So it will most likely be a Conservative government limping along the same path they were.
“The vote outcome is political embarrassing for the Conservatives of course, but the most important factor for the markets is the ongoing relationship between the UK and the EU. The Brexit negotiations won’t initially focus on a trade deal, potentially for months, so we’ll have to wait and see how that plays out. This outcome may make the UK position slightly weaker (albeit it wasn’t that strong to begin with) but I’m not sure it changes very much. I really don’t think this sheds much light on where Brexit negotiations are going.”