Content relevant to you

STARR INSIGHTS: What does the General Election hold for sterling and the economy?

by Robyn Harper

Following Prime Minister Theresa May announcing the snap election she always promised not to, investors and politicians alike have been left shocked and debating what is to come next for both sterling and the economy.

With the announcement of the 8th June General election came a sterling surge to its highest point since 2nd February 2017 and the markets are suggesting a massive majority for the Conservatives, due to the huge points lead they currently hold.

Dean Turner, an economist at UBS Wealth Management, said: “The muted response in sterling, gilts and UK equities suggests markets are savouring the possibility of much-needed clarity around the government’s Brexit negotiation stance. If the General Election is held, we believe it is highly likely the Conservatives will increase their majority and firm up the future direction of Government policy, particularly in regard to Brexit.”

Luke Bartholemew of Aberdeen Asset Management also gave his opinion: “It will take investors some time to digest the effects of the election in the next few days. A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely. The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenches which currently hold a disproportionate sway over her party’s stance on Brexit. That would be welcomed by financial markets.”

The prospects for the pound are also highly likely to be affected by the stances taken by opposition parties. Shilen Shah, a bond strategist at Investec said the announcement “suggests the PM wants full control of the Brexit process without any interference from the opposition.”

The timing here is key for the election with the Conservatives much more heavily favoured than any other part. Adrian Lowcock, an Investment director from Architas, said: “politically the timing might not get any better for the Conservative party to win a general election and increase their majority. The UK economy has remained strong following the EU referendum and stock markets have rallied to new heights” whilst the opposition are languishing behind. “General elections create uncertainty and markets do not like uncertainty. The market has begun to price this in and there is likely to be an uncertainty discount on the UK stock market until the election result is known.” Following on from the government constantly ruling out a snap election, they will now have to set out the future of the UK in the election manifesto.

Another effect of the election being called is that it means very little will be achieved in the Brexit negotiations in the first half of 2017. Claus Vistesen, the chief Eurozone economist of Pantheon Macroeconomics, said: “It’s anyone’s guess what happens next with Brexit. We sympathise with investors’ desire to position for various outcomes, and to hedge tail risks, but we feel that such actions are bit like throwing arrows into a dark void at the moment.”

Ultimately, no one can predict the future landscape of sterling and the economy, following the shock announcement of a snap election. All we know is that the Conservatives are hot favourites to remain as the country’s leaders, meaning a stronger mandate for Brexit and some much needed clarity following the election.

comments powered by Disqus