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The Upside Of The Snap Election

Win Some, Lose Some

The Upside Of The Snap Election

Ever since Theresa May unexpectedly called for a snap general election yesterday criticism has run rife of her “dishonesty” and “partisan self-interest” in light of her remarks a few weeks ago that there would be no general election until 2020. And while the frustration surrounding this sharp turnaround is understandable, it fails to take into account the benefits of and legitimate reasons behind a June election. 

Strengthening the Position

May has justified her change of heart as an effort to reallocate the country’s “unity of purpose” to Westminster in the event of a Conservative victory, a reaction to the apparent risk that the Liberal Democrats, Labour and the SNP may vote against the final Brexit deal.

A snap election, regardless of its outcome, will strengthen Britain’s hand during Brexit negotiations because of the assurance that there will be a consistent continuation of government until 2022. The alternative would result in a 2020 general election entangled in the final Brexit negotiations. It is certainly true that the unexpected calling of a snap election could give rise to further uncertainty, especially in the event of a non-Conservative win, but perhaps it is preferable to have political uncertainty in advance of final Brexit negotiations rather than simultaneously. The fact of the matter is that when it comes to Brexit, the UK is moving in uncharted waters and uncertainty at every turn should be considered a given.

The Laws of Uncertainty Have Changed

Rather ironically, May initially stated that she would not call an election so as to avoid creating further uncertainty when stability was needed so urgently. But as the old saying goes, markets do not lie, they are the best detector of uncertainty and so far they have reacted with some degree of positivity to the snap election announcement.

(pound gains following the snap election announcement)

Yesterday, the pound reached a 5-month high against the dollar, whilst the FTSE 100 suffered a significant drop after enjoying months of gains from the devaluation of the pound due to the numerous multinational companies listed on the exchange. It has not gone unnoticed that yesterday’s market reactions are highly uncharacteristic of the economic response to snap elections, which usually serve to increase uncertainty.

It would seem that some investors are optimistic that a snap election may result in a softer and more market-friendly EU exit. However, much of this optimism is based on the assumption that May will increase her House of Commons majority, which there is of course not guarantee of.

The pound’s gains come with many benefits, from reduced cost pressure on UK importers of foreign exports to a more competitive stance for UK sellers in the M&A market.

Conclusion

Uncertainty is the name of the game as far as Brexit is concerned and despite the fact that markets, investors and citizens were not expecting an election until 2020, the reaction so far has come with its benefits and perhaps reduced uncertainty in the long run. Markets will wait with eager anticipation to see how the political landscape develops in the run up to June 8th.

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