Aaron Hankin
Theresa May’s bold move to call a snap election on April 18 to strengthen conservatives’ position in Parliament failed Thursday when the Tories fell well short of winning a majority in the U.K. House of Commons creating what is known as a “hung parliament.” With just one seat of the 650 yet to be decided, the center-right party had 318 seats, down from 331 in 2015 and short of the 326 required to form a majority.
The result has left the U.K. with a hung parliament, where no party has a clear majority. So what does that mean for investors?
Increased Volatility and Uncertainty
Investors have been craving volatility, which has plunged to record lows in recent weeks. Thursday’s result saw volatility in both currency and equity markets return. While it remains at multi-year lows, the uncertainty going forward – most notably around the future of Brexit – will keep markets on edge.
The strong showing from Jeremy Corbyn and the Labor party that won 261 seats has put the hard Brexit path in doubt. Theresa May has said she would go ahead with the negotiations governing with a minority. However, with just 318 seats the possibility of talks being delayed have grown, which will throw further uncertainty across the U.K. and Europe. “This Government will guide the country through the crucial Brexit talks that begin in just 10 days and deliver on the will of the British people by taking the United Kingdom out of the European Union,” May said outside 10 Downing Street today.
Lower Currency = Cheaper Stocks
It’s a little counterintuitive, but the uncertainty after the vote and increasing volatility have seen U.K. stocks rally. In short, the falling British pound has made stocks cheaper for offshore investors who have to buy British pounds to invest in U.K. markets.
This was evident after the initial Brexit vote when the pound collapsed, falling over 10 percent in a week. However, as the pound fell, U.K. equities rallied to record highs as overseas investors flocked to take advantage of the cheap currency.
Diversify
Diversity is a part of every good portfolio. But now diversity is more important than ever as all asset classes react to the hung parliament in different ways. The British pound tumbled to a six-week low Friday; the FTSE 100, a more international index, rose 1.1 percent, while the FTSE 250 fell and U.K. bonds rallied as investors headed for safe haven protection. “What does this mean for investors? The market reaction to this unwelcome outcome is likely to hit UK shares, bonds and the pound,” Tom Stevenson of Fidelity told the Independent.
“Markets will likely remain on the back foot while the difficult job of putting together a workable government is undertaken. This is when a well-diversified portfolio comes into play. The case for a well-balanced portfolio, geographically and by asset class, has never been stronger.”
The Bottom Line
The disappointing showing from the Tories on Thursday has investors questioning their portfolios. The significant turnout of young voters has dented Theresa May and her plans to negotiate a hard Brexit for the U.K. Without a clear majority the Tories are going to need support, which will likely come from Northern Ireland’s Democratic Unionist Party (DUP).
However, even with this support, the strong showing from Labor will have Corbyn and his supporters demanding some say in the Brexit talks. “Our position is very clear – we want a ‘jobs first’ Brexit, therefore the most important thing is the trade deal with Europe,” Corbyn said.
This article was written by Aaron Hankin of Investopedia and was legally licensed by AdvisorStream through the NewsCred publisher network.
