The stunning loss of the Conservatives from the UK’s snap election has resulted in a loss of confidence in Theresa May to proceed with a ‘soft Brexit,’ inevitably affecting various sectors of the stock market in response.
In the weeks leading up to the election, many individuals expected the Conservatives to win majority— after all, Theresa May took a gamble in calling for a snap election to make Brexit negotiations easier in Parliament. Under a circumstance where they actually won, we would likely see a stronger British pound against the Euro and a boost in risk asset stocks because of the increase in general confidence by the public for Theresa May to negotiate Britain’s exit from the EU.
Risk assets would also expect to rise, but not by a significant amount. Because the price of a stock is essentially the future value of its present cash flows, the market would not see a significant change across various sectors because of the 90% probability that Conservatives would hold the majority. Therefore, the stock prices would already be a reflection of this likely outcome.
The shock election result caused the British pound to decline in value to a seven-month low of €1.1287 against the euro. Not only do investors expect Brexit negotiations to become far more difficult now than if Conservatives won, but there is also heightened political uncertainty, with a possibility for another general election. Although Theresa May had stated that she will form a government with aid from Northern Ireland’s Democratic Unionist Party, there is a lack of confidence across the UK of that actually happening.
If the pound continues to be weak, as it did the majority of the year, we expect higher inflation and therefore less purchasing power for consumers. Moreover, foreigners have a decreased incentive to work abroad because frankly, sterling is now worth less.
While the Conservative party boasted implementing policies such as capping energy prices, adding an additional £8 billion to the NHS per year, and attempting to make the UK completely independent from the EU, the Labour party also has some targets on their agenda.
Jeremy Corbyn, the leader of the Labour Party, plans to increase corporate taxes, put a cap price on electricity bills, nationalise the railway system, and decrease tuition fees. Naturally, the business sectors related to these issues will be affected, but time can only tell how the markets will react to the new labour party laws.
While many people are not aware of the resemblance between political elections and the stock market, the UK general election is a reminder that shows how intertwined the two really are. The markets can be an excellent visual interpretation of current political issues, although the pattern may be a bit difficult to piece together at first.