Political Uncertainty Remains - But It's Economics That Matter
UK election result - initial reaction
2 min read
Investors are currently coming to terms with the Conservative Party’s failure to win the majority it sought from the UK electorate. Markets hoped to see an end to political uncertainty but this result sees a lot of questions unresolved.
While markets hate surprises, and the UK electorate has certainly delivered one, it is important to remember that this is a political surprise and not an economic event. Sterling has weakened overnight against other currencies, but we are not seeing the sharp falls that followed the referendum in 2016 or any immediate sell-off in equities.
Overnight in Asia markets remained buoyant with the Nikkei ending the day up 0.49% and the Hang Seng slightly lower by 0.45%. Global markets are likely to remain positive for equities and other risk assets while the global economy remains strong.
Looking ahead to Brexit
The absence of a clear majority for any one party has potential implications for the upcoming Brexit negotiations. Assuming that the Conservative Party will form the next government, they will be depending on the support of other parties to see any deal through a vote in Parliament. This is likely to mean compromise around key topics such as immigration from Europe, the status of European Human Rights legislation and the scale of any payments that need to be made to the EU before exiting, and potentially a softer Brexit overall.
However, it is likely that there will be a rise in political rhetoric surrounding the negotiations in the coming months that could potentially bring some volatility in markets. Ultimately we expect common sense to prevail and to see a deal that largely maintains many of the beneficial trade arrangements that work for both sides.
Whatever the short-term market impact of this result, it’s our view that the UK economic environment will remain supportive for equities for the time being. Looking further ahead, we still see markets driven by a stable global economy, underpinned by a robust environment in the US.
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Markets have reacted with relative calm to the surprise election result today. In our view political events have less long-term impact on markets than economic events, but we will continue to monitor market reactions as events unfold.
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