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What Does UK Hung Parliament Mean for Europe ETFs?

Sanghamitra Saha

British Prime Minister Theresa May’s wager on gaining majority backfired when her Conservatives party emerged the largest but lost majority in a snap election on June 8, 2017. May stunned the world in April by calling this June election, three years ahead of schedule. Continuous opposition from members of the House of Lords on Brexit negotiations led Theresa May to take this step.

Now, Britain is likely to have a hung parliament in the absence of a clear majority. As per the source, the election saw about 69% of turnout, the highest since 1997. To gain a majority, a party needs to get 326 seats, while the Conservatives have secured 310. As a result, May's party won’t be able to form a government without the help of minority parties.

Labour Party leader Jeremy Corbyn has already asked for May’s resignation. Some market watchers believe that “she would attempt to form a government even if her party loses its majority.”

However, at this moment, Britain needs a stable and strong government so that it can push through its mandates seamlessly. So, any kind of coalition government may not be productive for Britain over the long run.

Plus, incumbent Theresa May is less likely to secure support from other parties given her inclination toward a hard Brexit, as per the source. And failure to amass the required seats may throw her away from power.

Market Impact

No doubt, the result triggered the bout of political uncertainty in the U.K. Notably, formal Brexit talks are slated to start in about 10 days. This will ensure Britain’s exit from the EU in March 2019.

The CurrencyShares British Pound Sterling ETF FXB dropped over 0.1% on June 8 while it lost about 1.9% after hours in appreciation of huge volatility.iPath GBP/USD Exchange Rate ETN GBB will also be in focus in the near term (read: Is the Bearish Run Over for British Pound ETFs?).

Will a Soft Brexit Boost Europe Markets & Pound?

May’s faltering situation indicates that the Brexit process may be deferred or the terms of the separation of Britain from the EU's single market and customs union, which is fundamentally a free-trade zone, will now be benign. 

As per analysts like Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, “a hung parliament isn’t a worst-case scenario. In fact, it could be positive over the long-term as it means Brexit would have to take a softer-form.” So, the U.K. election is not likely to be hugely impactful on global stocks over the medium term (read: Europe After Brexit: 5 Keys to Investing with ETFs)     .

Notably, in June 2016, when Britons voted in favor of leaving the EU with the ‘leave’ camp gaining 51.9% support, global stocks were sold-off and British pound plunged to a 31-year low. So, one can understand that a soft Brexit will end up benefiting the currency (read: Pound ETF Plunges: More Sell-Off in the Cards?).

Likely Impact on Europe ETFs

That being said, we would like to note that short-term gyrations are expected from the market in the near term. EU Budget Commissioner Guenther Oettinger said, “with a weak negotiating partner, there’s a danger that the negotiations will turn out badly for both sides.” So, U.K. ETFs like iShares MSCI United Kingdom EWU and Euro zone ETFs like iShares MSCI Eurozone EZU would be in focus in the days to come.

Investors should also note that as soon as Britain cuts the cord with EU, its importance as a corporate transit to the rest of Europe would be lost, going by an article published on CNBC. This would impact iShares MSCI Europe Financials EUFN a lot. So,the fate of this hung parliament has a lot to do with the future course of EUFN (read: UK Votes for Brexit: ETFs Winners & Losers).

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CRYSHS-BRI PD S (FXB): ETF Research Reports
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