The 'Maybot' campaign self-destructs - Conservatives lose majority

Prime Minister Theresa May has survived, for now at least, with the highest number of seats by any single party, but has lost her overall majority.
Jason Lejonvarn

The Conservatives have gone from a position of power, an outright majority in Parliament and an average poll lead of up 20 points when the snap election was called on 18 April, to a significantly diminished standing. Initial expectations were of a Conservative landslide but the campaign lost ground on a weekly basis.

May justified the unusual snap election to “guarantee certainty and stability for the years to come.” Given the Conservative Party’s propensity for in-fighting and the loss of its outright majority, a Conservative leadership contest is the only certainty resulting from the election. As for Brexit, we are none the wiser. May initially ran on Brexit to strengthen her hand in negotiations. Now whether a Conservative led coalition government will change the Brexit strategy is another unknown known to add to the unclear Brexit strategy.

Sterling outlook

Sterling has been the bellwether asset class since the Brexit referendum. Mellon Capital currently has a negative view on sterling based on the UK’s terms of trade, leading economic indicators, and low real interest rates, rather than the election outcome. The demands placed on a Conservative coalition government are likely to prompt further sterling weakness. Mellon Capital does not anticipate a significant move in interest rates but the risk of yields rising has heightened as buyers may require an additional uncertainty premium. On equities any softening of sterling will benefit the multi-national dominated FTSE 100 as it has done so over the last year.

Mellon Capital’s biggest concern with UK asset classes is the overall health of the economy. Among the developed economies, the UK’s coincident indicator is below zero (-0.24), indicating contraction over the next 12 months. Furthermore the UK’s leading indicator is more negative (-1.03) reinforcing that trend, while UK inflation is expected to move higher due to the impact of the weaker pound. In contrast the EU coincident (+0.22) and leading (+0.83) indicators are both expansionary over the next 12 months.

The Brexit negotiations could be affected by May’s election folly: a “hard Brexit” could become ever soslightly softer. However all this would depend on the internal balance within the Conservative Party and its coalition partner. The so called ‘blue Kippers’ or right-of-centre Conservatives could press on with a hard Brexit or a coalition partner could insist on a softer, less cavalier view. In other words they would want to strike a deal with Europe rather than resorting to May’s pre-election Brexit blithe view that: “no deal is better than a bad deal.”

Negotiating positions

Irrespective of internal Conservative party machinations, formal negotiations on the ‘exit bill’ rumoured to be up to €100bn and citizens’ rights are likely to top the agenda. The EU’s negotiating position is unlikely to change significantly, especially as French President Emmanuel Macron and Germany’s Chancellor Angela Merkel consolidate their own recent domestic gains. May and the UK’s negotiating team also has to turn their attention to resolving the Northern Ireland border question, the requested second Scottish independence Referendum as well as considering potential replacement funding for EU-backed projects throughout the UK. That is a full agenda for an experienced prime minister, and even more so for a newcomer.

Former Prime Minister David Cameron International converted a coalition government into an outright majority but after an ineffectual Remain campaign had to fall on his sword. May has run an equally ineffective campaign which has put the Conservatives back where they started in 2010 only now with the obligation to deliver on Brexit. May’s “strong and stable” campaign was meant to highlight her competent leadership; the result unfortunately has been anything but stable and within weeks there could be a new prime minister. Similarly, the snap election was called to strengthen the UK’s hard Brexit stance – the result will undoubtedly weaken that position too.

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