Following a tumultuous campaign, Theresa May’s decision to call a snap election has backfired in spectacular fashion, with no party achieving an overall majority in yesterday’s general election and a Conservative majority wiped out after just two years in power.
Amidst great uncertainty, it seems most likely that, at least initially, the Conservatives will seek to form a minority government, relying on the support of the Democratic Unionist Party in Northern Ireland and Sinn Fein not taking their seats in order to control the thinnest of majorities in the House of Commons.
However, the Conservatives’ ability to enact their manifesto would be undermined by any rebellions among back-bench MPs. And even if Theresa May survives any challenges to her leadership and remains as Prime Minister, her political standing has been severely damaged by the election result.
With the Brexit negotiations due to start on 19 June and the clock ticking on the two year deadline under Article 50, the next government will have to quickly and carefully consider its strategy, particularly given an unclear mandate from the public.
Markets were expecting a comfortable Conservative election victory and, on news of a hung parliament, sterling fell by around 2% overnight against other major currencies. However, while there may be volatility ahead, the FTSE All Share index has opened around 1% higher in early trading this morning as a ‘hard Brexit’ now seems a much more remote possibility.
Client portfolios are well diversified and allocations to international equities, for example, are likely to benefit from any renewed weakness in the pound. Allocations to cash and short-dated corporate bonds meanwhile provide both downside protection and the flexibility to take advantage of any opportunities.
We will contact clients should we believe any changes to portfolios are required. If you wish to discuss any of the information in this update further, please contact your usual adviser.
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