Is This Theresa’s Month of May or Oopsy Daisy?

As always, our political commentary is non-partisan by design. We favor no politician or party and assess politics solely for its potential market impact.

Welp. Brits went to the polls today, voting in the general election Prime Minister Theresa May called back on April 18-presumably because her Conservative Party had a 20-point polling edge over Labour at the time, making it seem like a fine opportunity to increase her 12-seat majority. Alas, it's always the best laid plans: As the campaign heated up, polls narrowed, and the first round of exit polls sees May's Tories losing 17 seats, walking away with just 314-12 short of a majority.^[i] Counting is only just under way, and it will be hours before we know whether these early results stand-2015's exit polls proved wrong, projecting a hung Parliament, but exit polling in 2010, 2005 and 2001 was more or less right. This could easily shift in any number of directions. But if it holds and the UK gets a hung Parliament, our views are unchanged from our earlier commentary: A hung Parliament means gridlock, which should be fine for UK stocks.

Here are the exit poll's full projections:

Exhibit 1: UK Election Exit Polling

Source: BBC News, as of 6/8/2017. NI refers to Northern Irish parties including Sinn Féin, the Democratic Unionist Party (DUP), the Ulster Unionist Party (UUP) and the Social Democratic and Labour Party. The UK Independence Party is projected to win zero seats.

There are a few different potential outcomes. Since the Conservatives would have the most seats, they'd get the first crack at forming a government. They could start by trying to reform their old coalition with the Liberal Democrats, which governed from 2010 to 2015. Together, they'd have a two-seat majority. But it's an open question whether the Lib Dems would be keen. Joining with the Tories last time around proved to be political suicide, as the Conservatives' center-right platform didn't much overlap with the Lib Dems' center-left leanings. Forced to abandon several key campaign pledges in order to remain in government, the Lib Dems-and particularly then-leader Nick Clegg-gained a reputation as powerless opportunists. Their supporters punished them accordingly at the 2015 election, reducing their seat count from 57 to just 8. Bumping their share to 14 would be something of an achievement, and we're a bit skeptical they'd want to undo the renewed goodwill by rejoining an arrangement that nearly killed them. Moreover, Brexit was a central theme in this election, and there is next to no overlap between the Tories' and Lib Dems' respective Brexit stances. Hence, Northern Ireland's unionist parties might be the Tories' preferred starting place, but it remains to be seen whether the Democratic Unionist Party (DUP) and the Ulster Unionist Party (UUP) combined can put a Conservative-led coalition over the hump, as those 18 projected Northern Irish seats include Sinn Féin (which abstains) and the Social Democratic and Labour Party (SDLP), which usually sides with Labour. And don't forget Northern Ireland voted against Brexit, potentially putting Northern Irish MPs in the same pickle as the Lib Dems. In either scenario, if the Conservatives do form a coalition, it probably does even less than the 2010-2015 coalition, which had a 76-seat majority. A coalition with broad internal disagreement and a razor-thin edge is all but powerless.

If the Tories can't form a coalition, they can try for a minority government or a "confidence and supply" arrangement with the Lib Dems, UUP and/or DUP, whereby the smaller parties support the Conservatives in confidence motions and budget legislation but vote their conscience the rest of the time. This would have a bit more stability than an outright minority government (a la Spain, Ireland, Denmark and Norway), but it wouldn't pass significantly more legislation. Either way, gridlock prevails.

Exit polls also give Labour an outside chance at forming a government if the Tories can't solidify a coalition or minority administration. The poll gives Labour, the Lib Dems and the Scottish National Party a combined 314 seats, matching the Conservatives' total. Plaid Cymru (the Welsh nationalists), the SDLP and the Greens could join too, as they all have a relatively large ideological overlap. Getting the UUP and DUP's support wouldn't be out of the question-former Labour PM Gordon Brown relied on DUP support for legislation in his government's waning days, so there is some precedent. Even if that happens and Jeremy Corbyn becomes the next Prime Minister, he too likely faces gridlock-so presuming his leadership means a return to ultra-high taxes, heavy-handed state intervention and renationalized industry is beyond premature.

If no one is able to cobble together a functional coalition or win a confidence vote with a minority government, yet another general election could result.^[ii]

For now, though, this is a wait-and-see moment. Actual results could diverge enough to give the Tories a slim majority on their own, which might be sufficient to let May keep her job as party leader.^[iii] But whether Britain ends up with a tiny Tory majority, Tory-led coalition, minority Tory government or Labour-led hodgepodge, the larger result is the same: gridlock, with lower risk of radical legislation. The approach to Brexit talks is a wildcard, but that was always the case, even if May won a commanding majority. So far, all we've seen from both EU and British politicians involved is posturing, and it's unknowable now how any of these leaders will act once they get down to brass tacks. Plus, for markets, Brexit is so widely discussed and slow moving that it likely lacks material, market-moving surprise power. Hence domestic legislation is likely the swing factor, and having a government that can't pass much-regardless of its leadership or composition-should relieve UK stocks.

Watch this space for more if the results shift radically from the exit polls, but as long as gridlock appears likely to prevail, our analysis and present opinion probably hold.