UK Prime Minister Theresa May surprised Tuesday morning when she announced her intention to call an early general election on June 8—three years before the regularly scheduled vote—to bolster her Conservative Party government’s mandate before entering Brexit negotiations.[i] As May explained, Parliamentary divisions “risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country. So we need a general election and we need one now.” British markets reacted somewhat negatively, with the UK’s FTSE 100 down -2.5% Tuesday and another -0.5% Wednesday (both figures in pounds),[ii] while sterling strengthened against the dollar. Though this probably increases the noise and adds another wrinkle to the Brexit saga, the election likely isn’t a gamechanger for markets.
May cannot unilaterally call for new elections and dissolve government because of 2011 legislation fixing parliamentary terms to five years. Hence, May had to get Parliament’s approval for the move—a two-thirds majority, no less—which she did Wednesday, in a 522 – 13 vote. There was basically no material opposition to the idea. Labour voted in favor, while the Scottish National Party (SNP) abstained.
With the vote, 650 Parliamentary seats will be up for grabs come June 8. Based on current polling, most experts see May’s Conservative Party as the overwhelming favorite in a general election, believing it will add to its current 17-seat majority. Some individual polls have the Conservatives up by more than 20 percentage points, which they translate to a 100-seat majority post-vote. Much of this reflects the weakness of the opposition: Labour is polling at its weakest levels in seven years and support for the Liberal Democrats is still in the single digits. Even the far-right UKIP has floundered. The SNP is strong in Scotland, with polls showing it has a commanding lead over Labour and the Conservatives, but that isn’t a change from the present Parliament, in which it controls 56 of Scotland’s 59 seats.
In addition to taking advantage of a weak and divided opposition, May aims to strengthen her administration’s mandate going into Brexit. The Conservative Party chose May as prime minister following David Cameron’s resignation in the wake of the Brexit vote—she was not formally elected by the people. The slim majority May inherited makes her vulnerable to Conservatives (particularly of the euroskeptic variety) breaking ranks. If May can bolster that majority, it would give her significantly more leeway to push her administration’s agenda at Brexit talks. Moreover, the next general election wouldn’t be until 2022—further removed from Brexit.
While the snap election adds another wrinkle to already noisy Brexit coverage, this doesn’t fundamentally change our outlook toward the UK or Brexit developments looking ahead. Though the Conservatives look like a strong favorite today, as Brexit and 2015’s general election are testament to, polls aren’t infallible. Politically, it might surprise if Labour or the Liberal Democrats mount a strong campaign, but it isn’t impossible—we just won’t know until June.
More importantly, this election doesn’t fundamentally change the fact Brexit is happening. No one is arguing for a new referendum, particularly now that Article 50 has already been invoked. What the campaign seems to mostly center on is the nature of said Brexit. Some euroskeptics are willing to take a harder line on sociological issues like immigration, even if it hampers trade deal plans. Others, like the SNP or Labour, prioritize trade.
If May’s Conservatives lose the general election (unlikely), an opposition party will take the lead on Brexit negotiations. Could a new lead voice stoke uncertainty? Sure. But remember, UK-EU talks haven’t even started yet. Everything is still in the speculation stages. Even under a new administration, Brexit talks will still garner plenty of attention and scrutiny, thereby allowing markets to price in those developments over the next two years or longer.
Now, if May succeeds and wins a huge majority, that could mean a more active legislature for things non-Brexit related. This development wouldn’t be spectacular, but it’s only a possibility—not a probability at this point—but one worth considering. That said, this government has had a case of Brexit tunnel-vision to date.[iii] A study by Thomson Reuters shows that the number of new laws fell by 29% last year, presumably because of the Brexit referendum and subsequent political upheaval. While pols and media freaked out, this lack of new laws and overall gridlocked political environment has been a positive, in our view. The UK economy is in fine shape and is thoroughly competitive—the less the government tinkered with things, the better. While it seems counterintuitive, the focus and attention on Brexit could continue to shield Britain from other legislation that could possibly roil sentiment and markets.
While the ensuing election campaigning and chatter could stoke day-to-day volatility, this doesn’t change our view of falling uncertainty across the Atlantic this year. This is just one more uncertainty domino to fall. Whether May and the Conservatives extend their majority or not, the UK and EU will still take time to hash out their new future relationship—those currently unknown details will be the ones to watch.
[ii] Source: FactSet, as of 4/18/2017. And an argument for global diversification, as the UK is only about 5% of world market cap.
[iii] This is understandable, mind you, considering the size and complexity of discussions.