The prospects of the UK leaving the European Union have become less certain after the ruling Conservative Party failed to win an outright majority of legislators in yesterday's snap general election.

(An earlier version of this item was published a few hours' ago on a sister publication to this one; it is republished here because US markets and investors will no doubt be focused on what the result may mean for sterling-based assets and the US's own diplomatic ties with the UK and rest of Europe.)

Wealth managers wondering how the UK’s upcoming formal negotiations over Brexit, due to kick off in 10 days, will go, now must grapple with the uncertainties caused by results of the general election showing that no party has won an overall majority of seats in the House of Commons.

Sterling at one stage fell by as much as 2 per cent against the dollar in the early hours of today as exit polls - broadly corroborated by actual results - showed that Prime Minister Theresa May’s decision to hold a snap election had proven to be a massive setback for the Conservative Party, at least for the time being. Yields on 10-year gilts fell - a classic “safety play” but FTSE futures recouped early losses and turned 0.3 per cent higher, perhaps on hopes that a weaker pound would help the economy (Reuters, other media.)

The Conservatives have won 318 seats, Labour has won 262, the Scottish National Party won 35, Liberal Democrats 12 seats and Democratic Unionist Party 10 seats. The results showed that the United Kingdom Independence Party, which had no seats at the time of the election, had seen its share of the vote collapse, with voters defecting to Labour and the Conservatives.

Labour, led by hard-left MP Jeremy Corbyn, who has campaigned on promises to hike taxes on the “rich” and raise spending on public services, has fared well, confounding predictions that Corbyn’s political stance and controversial associations in his past will damage him. One conclusion from the pundits is that Corbyn managed to galvanize young people into voting for him, excited by his promises, however implausible or economically foolish, of free college tuition and higher spending on various causes. Also, it is hard, if you are a Conservative, to attack Labour for being economically illiterate if you also propose ideas such as worker representation on boards, energy price caps, and other forms of interventionism. May, one feels, made the mistake of assuming that ditching "Thatcherite" free market zeal and reverting to paternalism would be a vote winner.

Where does this leave the wealth management industry and most importantly, its clients? To begin with, it is worth noting that it is unclear whether Mrs May will stay on, or be allowed to do so, as Prime Minister. Even if she manages to do so, there will be talks about whether the Tories can form a coalition with other parties, or try to operate as a minority government, living vote by vote. By contrast, there could be some form of alliance by Labour and other parties, but prior to the election, there was great talk - as is usual – by parties about their refusing to enter such talks. Investec, the banking group, has pointed out that May could try to hold on until next year, when constituency boundary changes take effect. These are estimated to bolster the Tory presence by a net number of 25-30 seats.

Some reactions from wealth managers gave a flavor of what is at stake. “At a time when the UK economy is already showing signs of slowing, the last thing it needs is inescapable uncertainty. The prospect of an unstable coalition and a muddled position on Brexit, could lead business and consumer confidence to fall through the floor,” UBS Wealth Management said in a statement. “With inflation already eroding the spending power of households, and business investment troubled by the uncertainties of Brexit, there would likely be some downside risks to our already-below consensus estimates of 1.4 per cent GDP growth for this year and 0.7 per cent for next year,” it said.  

Timetables
What this all means is that it is by no means clear that Brexit talks with the EU can begin on the current timetable; it may be that, if any sort of coalition/minority government administration is formed, that the most that could be achieved will be the so-called “soft Brexit” involving the UK retaining access to the Single Market, free movement, with some concessions around payments and regulation. This might arguably be the least-worst outcome from a business point of view. In a run of conferences and seminars that this publication has attended, it has been made very clear that the financial services industry is worried about loss of market access that could come about if the UK goes for a “hard exit”. It is also important to consider that the Liberal Democrats, who campaigned for a second referendum and who want to thwart Brexit, fared very poorly in this election. Its former leader, Nick Clegg, lost his seat.

Another point worth considering is that last June’s referendum result, giving a 52-48 per cent vote for Brexit, was a clear result, but not a massive one. It is necessary that the views of those who wanted to Remain be respected, if not given the ultimate whip hand; maybe it is right that any government arising from this messy situation tries for a form of compromise. Some may see the current situation as "gridlock" - but then again, when politicians cannot get a great deal done, this isn't always such a bad thing, if you fear hyperactive legislators.

It is early days to know where this result might leave, for example, the likely direction of taxes, or what will happen around public spending, debt, and other financial issues. One conclusion worth drawing is that the wealth management industry needs to realise that the case for free enterprise, particularly in financial services, is still in retreat since the financial tsunami of 2008. It is worth pointing out that in considering many of the political earthquakes of recent years - the rise of Trump, Brexit, and now the UK general election - populism in its various forms has been on the rise. While it can take many different forms, from relatively benign to downright nasty, the rise of populism typically comes at the expense of modest, limited government, liberalism and belief in open markets, respect for private property and due process of law. In today’s political culture, calls from all sides of the spectrum will be for more intervention, more spending, and more taxes. For those of an older generation who recall the turbulent times of the 1970s and 80s when countries sought to roll back some of the excesses of the State, this shift back to the appeals of Big Government is troubling. The 1990s have sometimes been called the period of the "great moderation"; 30 years' on from the fall of the Berlin Wall, it feels very different.