How Will Markets React To The UK Election?

Theresa May

The UK has had an extraordinarily turbulent two years in politics, and earlier this month the country produced yet another dramatic turn of events. Prime Minister Theresa May, who came to power in 2016 with the intention of engineering the formal “Brexit” (the UK’s exit from the European Union), called for what’s known as a snap election. The idea was for her to gain more support via conservative seats in Parliament. However, May’s call for the election appears to have backfired massively. The election resulted in a hung Parliament, which is to say no party has a clear majority. The early take on this seems to be that May’s position has weakened considerably, and many are looking to Labour Party leader Jeremy Corbyn as a potential new Prime Minister.

The surprising nature of this outcome will naturally remind a lot of people of 2016, when the people of the UK voted in a referendum to leave the European Union. Though some late stage polling actually predicted that the Brexit was likely, the decision still took most of the world by surprise. Political commentators seemed dumbfounded, and bookmakers experienced heavy losses after the referendum attracted unprecedented amounts of betting activity for a political event. What had looked like a dramatic and unlikely decision very suddenly became real, and the UK (and the rest of the world) was confronted with this simple but vital question: what happens next?

In large part, that question had economic implications. The Brexit was a decision more than it was a plan, which is to say there was no defined or thoroughly outlined process for leaving the EU. Thus, people wondered what would happen to the UK economy and how stock markets would react given the uncertainty.

For the most part, we can now sum up the markets’ response to the Brexit fairly easily. Charts indicate that the markets gradually strengthened after initial losses, even as the Pound plummeted in value. The FTSE 100, considered by some to be the “main” stock market index in the UK, actually jumped fairly significantly in the months following Brexit, largely due to the fact that most of its earnings are based overseas. The FTSE 250, which is more closely tied to the UK economy, had more modest increases after the initial sell-off. Still, neither market provided any reason for investors to panic once the dust settled.

The interesting question is, how the markets will react this time? May was always strongly in favor of the Brexit, and most analysts expected a “hard” Brexit when she gained power, meaning a complete and dramatic break from the EU. Her government opponents are mostly in favor of a softer approach, and with Parliament now split, it’s difficult to know what the formal process of establishing new ties with mainland Europe will look like. If the Brexit threw the UK into uncertainty, the results of this snap election have done the same and then some.

Early indications are that the major markets are having a split reaction to the snap election. The FTSE 100 showed early gains, while the FTSE 250 dropped off. The clearest explanation appears to be that the FTSE 100 relies more on international companies, which in turn can benefit from the fact that the Pound has remained weak ever since Brexit.

Right now, though, it still feels a little bit early to forecast just what the election results mean for the UK economy. A great deal is unknown, and it could remain that way for several months while the country sorts out its government and maps out its future.

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