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Market Update

Past Hung Parliaments Have 'Little Market Impact'

Morningstar U.K. Senior Editor Emma Wall spoke to three experts about how a hung parliament will affect stock markets and the economy.

Hung Parliaments Don’t Impact Markets
Ed Smith, Asset Allocation Strategist, Rathbones
Only two general elections have resulted in a hung parliament since the Second World War. The first was in February 1974 and the second in May 2010. February 1974 does not offer a paradigm relevant to today.

2010 offers a more appropriate case study, although the economy was on much shakier ground than today. The hung parliament only lasted six days before a Conservative-Liberal Democrat coalition was cemented. The pound fell 2% against the US dollar the day after the polls closed, and continued to fall a further 2% even after the Liberal Democrats announced their approval of the coalition deal.

After two months, the pound was back above its initial level. That reaction was rather a subdued one, and indeed followed the pattern typical after all general elections. It should be noted that the pound had fallen 10% in the six months preceding the election, during which polls had indicated that a hung parliament was on the cards, but this was arguably more a function of the relatively more robust recovery of the US economy.

Another Election Next Year
Azad Zangana, Senior European Economist, Schroders
This is not the best outcome for investors; the election result is a big hit for confidence in the UK economy, and this has been reflected by weaker sterling this morning. It is worth noting that once a shock like this plays out the stock market will revert to fundamental drivers.

However, there is now a higher risk of inflation, and additional borrowing, which may mean higher gilt yields.

We are looking at chaos when it comes to the Brexit negotiations. The threat of pulling out of negotiations is hollow without Theresa May’s sought-for majority. There is a high chance we get another General Election over the next year.

There is also the added worry that if the economic slowdown becomes a recession the Bank of England is out of ammunition; rates cannot go any lower and quantitative easing has little impact in stimulating the economy. Fiscal policy – cutting taxes – is all that is left, but getting any such measure through parliament will be a nightmare, you need a strong government to get through difficult times.

No Risk of Emergency Central Bank Decision
Jim Leaviss, Head of Retail Fixed Interest, M&G Investments
Sterling has weakened overnight, but by only around 2% against the US dollar and euro. There’s been little bond market impact. At the margin there may be less austerity and fiscal tightening in future under a weakened Conservative Party, but there will be no significant rise in gilt issuance and the goal of reducing the UK’s debt over the next few years is likely to remain in place.

Whilst Jeremy Corbyn’s Labour Party did much better than expected, markets don’t need to think about the prospects of nationalisation and significant changes to taxation and spending plans.

The momentum of UK economic growth has been fading as we move through 2017. Retail sales growth, house prices and inflation adjusted incomes are all weakening in what remains a very consumption driven economy.

This election result and the continued uncertainty it brings suggests that this trend continues. The Bank of England is not going to tighten policy for the foreseeable future – although there is also no likelihood of an, emergency rate cut or quantitative, of the sort we saw post the Brexit result last June.