UK elections: Conservatives win big, Brexit will happen – what kind of Brexit is still unclear

The Conservative Party is the big winner of yesterday’s UK general election. With the results from 649 of 650 constituencies declared (as of 8.30am GMT), the Tories secured 364 seats, a gain of 47 compared to the 2017 election, while the Labour Party tumbled to 203 seats, losing 59.

Despite increasing their vote share compared to the 2017 election, it was a very disappointing night for the Liberal Democrats, who will send 11 Members of Parliament (MPs) to Westminster. Their leader, Jo Swinson, lost the seat in her Scotland constituency by 149 votes. The Scottish National Party (SNP) attained near total dominance In Scotland, winning 49 seats. 

With a forecasted working majority of 78, the Conservative government wants to move quickly on Brexit and bring forward legislation as early as next week to pave the way for Britain to leave the EU on 31 January. Brexit will definitely happen now (although it won’t be “done” in a practical sense because the negotiations over the future EU-UK relationship will occupy all of 2020 and possibly beyond).

There will be a lot of soul searching in the opposition camp. Labour leader Jeremy Corbyn intends to stand down, after a “process of reflection,” and the Lib Dems will look to a new figurehead to replace Jo Swinson. Remain parties hurt their cause by not cooperating more formally. The vote share of parties is likely to be quite close to the last poll of polls taken before the election, but the seat allocation was a surprise in favour of the Tories. 

Market reaction and outlook

The Pound surged overnight to briefly touch 1.35 against the U.S. dollar. In the days leading up to the election, sterling had usually strengthened on better polls for the Conservatives. Pound investors seemed to favour the clear outcome of a Tory majority over the only other realistic scenario, a hung parliament, which could have opened up the door for a second referendum or a softer Brexit. 

While the election outcome was quickly reflected in the pound exchange rate, the direction from here depends on what kind of relationship Boris Johnson really (really) wants to have with the EU. Over recent months, the Prime Minister often catered to two audiences on his Brexit policy. Centrist Tory supporters and voters hope that a large majority in the House of Commons will enable him to change gears and pursue closer alignment with the EU. However, the euro-sceptic wing of his party, the European Research Group, think he must not extend the transition period and instead go for a bare bones trade deal and a “Singapore on the Thames” model. Given that, the pound is still undervalued vis-a-vis the dollar on purchasing power parity and that positioning was short sterling going into the election, GBPUSD has the potential to extend its uptrend towards 1.38. 

Some stumbling blocks await next year. Many trade experts believe that a more comprehensive trade deal will take longer to negotiate than the current transition period, which lasts until December 2020. If the UK wants an extension, it will come into focus by late spring and will have to be decided in the summer of 2020. Separatist voices could become louder.  The SNP wants to request an independence referendum for Scotland and, for the first time, there will be more nationalist than unionist MPs from Northern Ireland. 

UK equity markets traded higher after the open (as of 8.30am GMT). Large cap stocks rose 0.8%, held back somewhat by their strong negative relationship with the pound exchange rate. Domestically oriented mid-cap UK equities surged by more than 4% as the political uncertainty was resolved. With risk aversion receding, the yield on 10-year UK government bonds (gilts) jumped by 6 basis points. More government spending is likely to be in the pipeline and gilt yields could be under further upward pressure.  

 

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

Site preferences