Future State of the UK
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UK General Election June 2017
Andy Burgess, Fixed Income Product Specialist, Insight Investment
9 June 2017
The hung parliament in the UK was a surprise to markets and introduces significant immediate political uncertainty to the UK. At the time of writing, the Conservative party was trying to form a minority government, but this raises the potential for another election in the near future. This adds to the uncertainty regarding the UK's position in the forthcoming 'Brexit' negotiations which are due to start on 19 June and the terms that the UK will be able to ultimately negotiate. The loss of seats by the Scottish National Party has arguably weakened their ability to push for a second Scottish independence referendum.
Prior to the election, markets were generally priced for an increased Conservative majority. The immediate market reaction saw sterling depreciate 2% against the US dollar after the first exit polls were released. Nominal gilt yields increased 3bp to 4bp while inflation breakevens initially increased by 8bp at 10-years and 10bp to 12bp at 5-years. However, these moves reversed almost as quickly leaving market levels largely unchanged this morning. Credit markets have also been largely unaffected, with certain sterling issuers opening wider before again reverting back to unchanged. Investment grade and high yield credit default indices generally tightened, as did higher-beta European names. Sterling weakened initially after the exit polls were released and has remained about 1.5% weaker against most currencies since. Within mandates with active currency positioning we have generally been modestly short sterling, expressed using options.
Up to now, while this result is a surprise to many in the market, the impact has been relatively muted across asset classes. We will continue to keep an eye out for opportunities caused by any short-term volatility and look at the longer-term trends as Brexit negotiations progress.
Paul Lambert, Head of Currency - Fixed Income, Insight Investment
9 June 2017
- Sterling fell c.2% against the US dollar as the exit poll was announced at 10pm yesterday, and has broadly remained at that level since (as at 9am today).
- From the UK referendum on European Union membership last year to yesterday, sterling fell c.13% against the US dollar. The fall last night appears to reflect additional uncertainty given the risk of a political vacuum. It remains the case that sterling is likely to be largely driven in the coming months by perception of the potential outcome of those negotiations. However, as sterling since last summer has apparently priced in a 'hard' Brexit, if the negotiations are perceived to result in a 'soft' Brexit, this could be positive for the pound over the longer term.
- More broadly, uncertainty over the implications of the result could have a negative impact on the economy. If this occurs, a negative feedback loop could develop, leading to further uncertainty and a further negative impact.
The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance. Unless otherwise attributed the views and opinions expressed are those of the fund manager at the time of publication and are subject to change.