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7IM Commentary - Initial Thoughts on the Snap Election

Posted Wednesday, 19 April 2017, 1.44pm

"The Prime Minister’s decision to request a vote for a snap general election for 8 June raises a whole host of possibilities. May explicitly declared that this vote has been called in order to shore up parliamentary support for her vision of Brexit and that the election would be, therefore, largely a second referendum on Brexit. Assuming, as we do, that the parliamentary vote to go forward is passed, the Tories will argue for Theresa May’s "deep and special" relationship with the EU, and to strengthen her hand in negotiations with the EU. Labour will argue for a ‘soft’ Brexit that prioritises the benefits of the UK’s existing relationship with the EU, while the Liberal Democrats (Lib-Dems) will probably campaign for a second referendum on the deal itself.

Unlike a normal election, we may see a significant proportion of the electorate voting tactically, based on their preferences for Brexit. Tactical voting will apply mainly in the major cities (which typically voted to Remain during the referendum), and the fallout from this will depend on how much the urban, Tory voters care about Brexit versus other political issues. We may also see a very different turnout from the 2015 general election, as the referendum has stirred up political emotions among younger citizens, who historically have been less likely to vote. This is their chance to reverse or, at least, restrain Brexit.

The behaviour of UKIP is another wildcard. Will UKIP see the election as an opportunity to bolster its parliamentary credentials, at the risk of taking pro-Brexit voters away from the government? Or could UKIP stand down its candidates, realising that a vote for the Tories is the best chance that they have of a clean break with the EU? With about 13% of the vote at the last election, UKIP voters swinging to or from the government would be significant.

The Labour leadership is another conundrum. Given the overwhelming evidence that few voters seem to want Jeremy Corbyn as Prime Minister, the opportunity of a general election (and the opportunity for success as well as for self-destruction), could encourage Labour to get its act together. Recently, Sir Keir Starmer has lead the charge against a "Tory Brexit" – many would view him as more electable than Corbyn. Such a turn of events would radically shake up the expectations for the election. Moreover, Labour could further stir things up by changing its position on Brexit – for example, by echoing the Lib-Dems’ call for a second referendum on the outcome of Brexit negotiations. Of course, we shouldn’t forget that the government can also change its position, and so the behaviour of incumbent Conservative MPs in Remain-leaning constituencies could be another surprise element.

Mixed up with all this is the fate of the Union and the future role of the Welsh and Scottish parliaments. The government has already promised significantly greater powers to regional parliaments in an attempt to win them over. Those powers could become pawns in the forthcoming election campaign. And we mustn’t forget that the EU also has a role to play – in setting out its stall for the negotiations to come, and in demonstrating to the citizens of the UK that Brexit would only come with a hefty price tag.

Anticipating unexpected events of this kind, we have held a relatively large proportion of Sterling in our portfolios since the EU Referendum.

Brexit is a massive and hugely complex undertaking. It was never going to be a straightforward process. Anticipating unexpected events of this kind, we have held a relatively large proportion of Sterling in our portfolios since the EU Referendum. We also recently purchased a call option on Sterling against the US Dollar, on the basis that the more unexpected events would be likely to derail (or, at least, soften) Brexit. These could cause Sterling to strengthen rather than to weaken. This option benefits from gains in the value of the Pound. The fact that we have done this is testament to our scenario-based approach, which takes a range of outcomes into account, including even those which appear unthinkable or even impossible at any given time.

Today’s surprise demonstrates the value of this approach, and we will now turn our attention to building scenarios for possible outcomes from the forthcoming general election."

Chris Darbyshire, Seven Investment Management (7IM) Chief Investment Officer

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