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Oh Snap! Funds Look for Softer Brexit in U.K. Election Turmoil

After the governing Conservative party lost its parliamentary majority, asset managers say a swift and total exit from the European Union is less likely.

  • Joe McGrath

Fund managers see Britain taking a possibly softer approach to withdrawing from the European Union now that the Conservative Party has lost its parliamentary majority in the U.K.’s snap general election.

The Conservatives saw their 17-seat parliamentary majority vanish as Britons voted for a hung parliament where no one party got the 326 seats required to govern on its own. This is only the second time this has happened since 1974, creating upheaval in the government as it prepares for its divorce from the E.U. in 2019.

In order to remain in power, British Prime Minister May, who had called for an early election in an effort to grab more seats for her party, is seeking to form a coalition government with the Northern Irish Democratic Unionist Party. A hard Brexit – or a swift and total withdrawal from the E.U. – looked more likely before the election, raising new questions about an already shifting financial landscape for British asset managers worried about losing their ability to sell funds in the Eurozone.

“The reality is Conservatives had been expected to pursue a fairly hard Brexit approach and it’s no longer clear if the U.K. will be following that path,” Roger Hallam, chief investment officer of currencies at J.P. Morgan Asset Management, said in an emailed statement. “There is equally a risk that very little politically gets done in the next several months as uncertainty reigns.”

Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, said the voting results make a "hard" Brexit less likely and that he expects a new general election to be called at the earliest opportunity. 

The British pound began falling June 8 amid the political shock, recovering slightly Friday morning from its sharp decline against the U.S. dollar, as the Conservatives repositioned to build a coalition with the Northern Irish Democratic Unionist Party.

Sterling was down around two percent at $1.27 at 11:00 a.m. Friday in London. The FTSE 100 index – which includes many international companies that convert their earnings into Sterling – was up  0.7 percent at 11:15 a.m. London time.

A softer approach to Brexit may end up being good news for the British pound in the long run, according to Trevor Greetham, head of multi-asset at Royal London Asset Management. Erik Norland, senior economist at CME Group, agreed, saying the election outcome might not be as bad for the U.K. currency as the initial reaction suggests.

After the vote, asset managers on the London Stock Exchange saw a slight dip in their share prices before recovering. At 11:15 a.m. London time on Friday, Aberdeen Asset Management was trading up by 0.3 percent at 288.5 pence, Aviva was up by 0.3 percent at 526.14 pence and Schroders was up 0.13 percent at 3,109 pence.

The uncertainty in financial markets after the stunning outcome of the U.K. election doesn't merit any immediate intervention by the British central bank, according to Mark Burgess, chief investment officer at Columbia Threadneedle Investments.

“We don’t expect the Bank of England to respond directly to the result, but it will be keeping a close eye on consumer confidence, particularly if the decline in the value of sterling extends further from here,” Burgess said.