Calculated gamble

UK Prime Minister Theresa May’s call for a snap election could prove to be a shrewd move. If it succeeds, it could produce a Conservative government with a renewed mandate, as well as a significant boost for Brexit negotiations with the European Union (EU).

How it helps the Conservatives
Under electoral reforms introduced in the last parliament, a snap election needs approval by a two-thirds majority of MPs. The Conservative PM, has, in effect, called the bluff of opposition parties, who have challenged her mandate for a so-called ‘hard Brexit’. The perceived benefit for the Conservatives from a parliamentary boundary review will not come into effect before this election.

The political risks
The Conservatives, however, are currently riding high in the polls. Meanwhile, Labour is struggling; its leader Jeremy Corbyn has been fighting for full support of his MPs, having already fended off a leadership challenge last year. There may not be time for the proposed ‘full and open selection process’ for new MPs (viewed in some quarters as an opportunity to purge the party of those members who have voted against him). Elsewhere, the UK Independence Party, a driving force behind last year’s Brexit vote, has also seen falling support in opinion polls.

The Scottish challenge
In Scotland, this snap election would be viewed by the Scottish National Party (SNP) as a chance to prove its mandate to hold a second independence referendum – after May knocked back a call from the SNP-led Scottish Government for a new vote last month.

A boost for Brexit
A Conservative win would help May’s bargaining position on Brexit. The EU had clearly been playing for time in negotiations, hoping to extend the transition period to 2019 (after the next UK election). The three-year transition period would now end in March 2022, before the next scheduled general election.
At a broader European level, this election would now mean crucial votes in Europe’s three largest economies in the next five months – which could be expanded to four countries if Italy (as expected) goes to the polls again. With Europe focused on its internal politics, it gives the US free rein on the international stage

Implications for investors
Of course, the major (if not only) issue for voters will be Brexit, but from an investors point of view we can expect lots of domestic sweeteners, such as a potential bounce for housebuilders. The expectation of a Conservative win could also benefit sterling and be supportive of UK domestic stocks – and will be negative for FTSE stocks due to the sterling translation effect – in other words, a reversal of the market reaction to the Brexit vote in the second half of 2016.

Michael Browne – portfolio manager – Martin Currie (Legg Mason Group)