1. Newsroom
  2. UK elections - Political challenges continue
Menu
Insight 12.06.2017

UK elections - Political challenges continue

UK elections - Political challenges continue

The disappointing outcome for UK Prime Minister Theresa May’s Conservative Party suggests a fragile political backdrop as the British government enters negotiations about its exit from the European Union.


We expect a weak British pound to shoulder much of the policy burden in cushioning the UK economy from Brexit.

UK fixed-income investors should be cautious, given low real yields and tight corporate spreads. Although sterling-referenced equity investors may benefit from globally-exposed, large-cap UK equities, we continue to prefer continental European equities to their UK counterparts.

Key points

  • Even in coalition with the Democratic Unionist Party (DUP), the standing of the Conservative Party in Brexit negotiations will be challenged
  • We expect sterling to shoulder a disproportionate share of the burden in helping the UK economy adjust to a post-Brexit world
  • Low real interest rates and tight spreads suggest modest fixed-income returns for UK fixed-income investors
  • Alhough UK equity investors should benefit from globally oriented, large-cap exposures, we continue to prefer continental European equities to UK corporates

With only one seat left to declare in the UK general election, it has been confirmed that Theresa May’s Conservative Party has lost its parliamentary majority. While a coalition with the Democratic Unionist Party (DUP) would be enough to keep the Conservatives in power, the apparent outcome of Thursday’s election serves to weaken rather than strengthen the negotiating position of the UK government as they enter into Brexit talks with the European Union. Indeed, the chance of uncertain support from her own party, combined with the potential for a weak and unstable coalition, leaves open the prospect that the UK will be spending a sizeable part of the first year of Brexit negotiations in a state of political limbo.

With the UK’s political engine sputtering, the chance of significant support for the UK economy to help ease the transition out of the European Union appears to be a growing headwind. While the US was able to turn to monetary policymakers for economic support during their period of political gridlock in the post-2008 era, the Bank of England today faces the unenviable challenge of high inflation and already negative policy against a backdrop of an external shock to growth (i.e. Brexit).

In light of this, we expect sterling to continue to shoulder a disproportionate share of the burden in helping the UK economy adjust in the coming years. Despite its rally from the June 2016 lows, the pound remains historically weak in real terms. However, just as was seen after the post-2008 shock (see chart hereafter), this period of weakness could persist for an extended period, thus allowing the domestic economy to transform itself to compete in the post-Brexit world.

More tactically, sterling appears to be properly priced against the current interest rate backdrop, when compared with US rates (see chart hereafter). However, it is pricing in little in the way of risk premia should there be an unfavourable outcome to the Brexit negotiations and/or continued instability of political leadership in the UK. Should the UK currency seek to price risk premia in in a similar way to that seen in the wake of the Brexit referendum in June 2016 (even assuming little change in US or UK interest rates), risks to sterling could see it move towards 1.15-1.20 against the USD.

Read more (.PDF)

LOK Michael.jpg

Michaël Lok
Group CIO and Co-CEO Asset Management

Norman Villamin-1.jpg

Norman Villamin
CIO Private Banking

GAUTRY_Patrice_UBP_72dpi-9511.jpg

Patrice Gautry 
Chief Economist

Insight

Navigating wealth succession in Asian families

Wealth succession is complex, emotional and can be costly if not managed properly

Read more

Most read

Insight 25.07.2019

Navigating wealth succession in Asian families

Wealth succession is complex, emotional and can be costly if not managed properly

Insight 16.04.2019

A Fresh Look at Japanese Equities

Making the case for Japanese equities

Insight 11.07.2019

Turning up the fiscal tap

In the prolonged global quantitative easing era, should the fiscal tap be turned up ? With monetary policy having basically run to its limit, fiscal stimulus through modest budget deficit can be sustained for a longer period.

Further reading

Insight 30.08.2019

Investing in a time of geopolitical uncertainty

Spotlight - Unlike previous cycles, avoiding economic recession no longer ensures markets can avoid falling into bear market territory.

Insight 29.08.2019

JPY – Sleeping giant is starting to wake

A further decline in USD/JPY to around 100 is expected in the months ahead.

Insight 28.08.2019

Hong Kong outlook as trade war and protests escalate

The market is probably preparing for even higher tariffs and retaliation measures spreading further into non-tariff, direct economic sanctions.