Britain has voted in the general election, and it looks as if the Conservative Party has won with a majority vote. This means that the current Prime Minister, David Cameron, will stay at 10 Downing Street and the coalition government formed with the Liberal Democrat Party in 2010 will be disbanded.
The Liberal Democrats fared extremely poorly in yesterday’s election, with 46 MPs losing their seats. Former Deputy Prime Minister Nick Clegg held his in Sheffield. The Scottish National Party has won by a landslide in Scotland, taking 56 seats, where previously they held just six.
While the prime minister remains the same, the government will look very different as Liberal Democrat MPs lose ministerial seats and faces and voices, in Parliament will change to reflect the popularity of the SNP in Scotland.
Nigel Farage, leader of the UK Independence Party, widely considered to be a protest vote against the last government, has lost his seat in South Thanet.
So what do these shock results mean for the British economy and the stock market? Opinion polls and market makers predicted a rainbow coalition – which would have meant instability for both the pound sterling and British equities. Is today’s result good news?
Neil Woodford, Fund Manager, Woodford Funds: The result of the election looks much better than expected -- that isn’t a politically inspired statement but one that is based on the fact that such a decisive result removes the risk of the prolonged period of political uncertainty that we had expected to prevail.
Nevertheless, it certainly doesn’t remove all of the political uncertainty. The performance of the Scottish Nationalist Party gives them a significant voice in Parliament but no power. Question marks remain, therefore, about the viability of the constitution and the Union. Meanwhile, the result will herald a referendum on Britain’s membership of the European Union in 2017.
The British economic outlook looks somewhat subdued over the next five years, regardless of the result. A less conclusive result would clearly have been worse for the economy because of the associated political uncertainty, but our assessment of the British economy suggests we should expect modest growth at best over the next few years.
Azad Zangana, Senior European Economist, Schroders: For investors, a clear victor removes a tremendous amount of uncertainty in the near-term over the ability of the government to govern and legislate and, as a result, the pound has bounced by about 1.25% against the U.S. dollar; 2.5% against the euro, while FTSE 100 futures are trading about 1.7% higher, with strong gains in banking and utility stocks, which were under threat by Labour policy.
In time, the focus of investors will shift to the uncertainty that will come ahead of the proposed referendum on the UK's membership of the European Union in 2017, which could prompt some domestic and overseas investment to be delayed. Latest polls on the question suggest that those who want to remain in the union have a small lead, but the majority is undecided.
Otherwise, in the near term, the clarity delivered by the election will boost activity as households and businesses can take investment decisions with greater certainty over tax and regulation. Looking further out, the projected election results give the Conservatives the mandate to continue to implement its austerity plan, even if that plan has been eased in recent years.
Government spending cuts are likely to continue, particularly in welfare payments where the government had sought to increase the relative gains for a return to work versus living on welfare.
Simon Derrick, Chief Currency Strategist, BNY Mellon: Last night's shock exit poll led to a robust early rally for the pound as investors breathed a sigh of relief that the coming days would not see an extended period of negotiations over the makeup of the new government.
Looking ahead the principal concern among investors will be the possibility of at least one and possibly two referenda in the UK over the next few years. Many will remember how poorly GBP performed in early September last year in the face of a potential Scottish exit from the union and wonder whether the threat of two new votes could similarly weigh on the currency.
While this could certainly prove to be a factor in the shorter term it is worth remembering two things. Firstly, that an EU referendum, or a possible rerun of the Scottish referendum, would be several years in the future.
Secondly, the Scottish referendum in 2014 only impacted the pound in the immediate run up to the vote despite a tight race through most of the year. In other words we suspect these potential votes will not weigh on thinking for more than a week or so.
What also seems unlikely is that either the advent of a minority Conservative government or a coalition government would itself weigh on the pound where this prove to be the final outcome. Past history – 1974, 1977, 2010 – indicates that investors are rarely worried about such an outcome.
