Stock markets and politics

Today the Conservative party is in disarray after losing its majority in the House of Commons in the UK. The Prime Minister Theresa May took a massive gamble calling a snap election in her quest to increase the Conservative party majority. Despite the fact that the Tory party was 24 percentage points ahead of their nearest rival, the Labour Party, there was a major turnaround in the final few days and the results were nowhere near those forecast in the early days!

So, how did the UK stock market react?

Testing all-time highs

The UK stock market was up over 1% after the pound plummeted against major currencies such as the dollar. It is bizarre but because the UK currency has collapsed on the currency markets this will increase the profitability of UK companies with overseas exposure when converting back into sterling. It also makes the UK a magnet for overseas investors, such as property investors, although imports will be more expensive because of the weaker pound.

Stock markets and politics

There could be repercussions in the short to medium term with concerns that the Conservative party’s deal with the Irish DUP to form a government will fall apart very quickly. Investment markets as a whole dislike any uncertainty because in a worst-case scenario or a best case scenario they can still put a value on assets. If there is confusion, concern and volatility it is almost impossible to place a reasonable value on any asset without adding a significant risk premium.

Watered-down government

The Conservative party will be under pressure to water down some of its more adventurous policies in order to be certain of support in the House of Commons. The government’s majority, including the DUP, will be less than 10, which is dangerous to say the least. Plans to reduce corporation tax will be out of the window, plans to reduce income tax will also go the same way as will some of the pro-business ideas.

Despite the fact that the UK stock market is up by over 1% today there are concerns that very soon reality will hit home. It is all good and well UK companies with overseas exposure benefiting from a weaker pound but what about the UK economy? For many companies listed on the stock market the UK is there bread-and-butter and the first indication of a weakening economy could see share prices fall into a tailspin.

Are there any similarities with the US?

On the surface the UK situation seems very different to that in the US and Pres Trump but is it? Donald Trump has wafer thin support for some of his more adventurous policies and has been forced to water down some of his ideas. The same can be said of Theresa May in the short term with many believing that her medium to long-term future is in grave doubt. The US stock market has been testing all-time highs on the back of Donald Trump and his ideas for the future and while the UK markets have risen today there “could be trouble ahead”.

So, in theory there are some similarities between the US and the UK stock market/political situation but in reality Theresa May is in a much more precarious situation than Donald Trump. Could the UK, fed up with elections and referendums, be subjected to yet another general election after Brexit?

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