Sponsored Content

These Are the Must Know Outcomes From the U.K.'s Shocking Election Results

Our political commentary is non-partisan by design. We favor no politician or party and assess politics solely for its potential market impact.

Thursday, Brits voted in the general election U.K. Prime Minister Theresa May called back on April 18. At the time, her Conservative Party had a 20-point polling edge over Labour, leading her and many others to believe the time ripe for the Tories to pick up more seats.

Yet as the campaign heated up, polls narrowed. Now exit polls are emerging that show May's party losing 17 seats, walking away with just 314 -- 12 short of a majority.[i] Counting is only just under way, and it will be hours before we know whether these early results stand -- 2015's exit polls wrongly predicted a hung Parliament -- but exit polling in 2010, 2005 and 2001 was more or less right.

This could easily shift in any number of directions. But if it holds and the U.K. gets a hung Parliament, that means gridlock, which should be fine for U.K. stocks.

Here are the exit poll's full projections:

Exhibit 1: UK Election Exit Polling

Source: BBC News, as of 6/8/2017. NI refers to Northern Irish parties including Sinn Féin, the Social Democratic and Labour Party, the Democratic Unionist Party (DUP) and the Ulster Unionist Party (UUP). The U.K. Independence Party is projected to win zero seats.

There are a few different potential outcomes. Since the Conservatives would have the most seats, they'd get the first crack at forming a government. They could start by trying to reform their old coalition with the Liberal Democrats, which governed from 2010 to 2015. Together, they'd have a two-seat majority. But it's an open question whether the Lib Dems would be keen. Joining with the Tories last time around proved to be political suicide, as the Conservatives' center-right platform didn't much overlap with the Lib Dems' center-left leanings.

Forced to abandon several key campaign pledges in order to remain in government, the Lib Dems -- and particularly then-leader Nick Clegg -- gained a reputation as powerless opportunists. Their supporters punished them accordingly at the 2015 election, reducing their seat count from 57 to just 8. Bumping their share to 14 would be something of an achievement, and we're a bit skeptical they'd want to undo the renewed goodwill by rejoining an arrangement that nearly killed them.

Moreover, Brexit was a central theme in this election, and there is next to no overlap between the Tories' and Lib Dems' respective Brexit stances. Hence, Northern Ireland's unionist parties might be the Tories' preferred starting place, but it remains to be seen whether the Democratic Unionist Party (DUP) and the Ulster Unionist Party (UUP) combined can put a Conservative-led coalition over the hump.

And don't forget that Northern Ireland voted against Brexit, potentially putting Northern Irish MPs in the same pickle as the Lib Dems. In either scenario, if the Conservatives do form a coalition, it probably does even less than the 2010-2015 coalition, which had a 76-seat majority. A coalition with broad internal disagreement and a razor-thin edge is all but powerless.

If the Tories can't form a coalition, they can try for a minority government or a "confidence and supply" arrangement with the Lib Dems, UUP and/or DUP, whereby the smaller parties support the Conservatives in confidence motions and budget legislation but vote their conscience the rest of the time. This would have a bit more stability than an outright minority government (a la Spain, Ireland, Denmark and Norway), but it wouldn't pass significantly more legislation. Either way, gridlock prevails.

Exit polls also give Labour an outside chance at forming a government if the Tories can't solidify a coalition or minority administration. The poll gives Labour, the Lib Dems and the Scottish National Party a combined 314 seats, matching the Conservatives' total.

Getting the UUP and DUP's support wouldn't be out of the question -- former Labour PM Gordon Brown relied on DUP support for legislation in his government's waning days, so there is some precedent. Even if that happens and Jeremy Corbyn becomes the next Prime Minister, he, too, likely faces gridlock -- so presuming his leadership means a return to ultra-high taxes, heavy-handed state intervention and renationalized industry is beyond premature.

If no one is able to cobble together a functional coalition, yet another general election could result.

For now, though, this is a wait-and-see moment. Actual results could diverge enough to give the Tories a slim majority on their own, which might be sufficient to let May keep her job as party leader.[ii] But whether Britain ends up with a tiny Tory majority, Tory-led coalition, minority Tory government or Labour-led hodgepodge, the larger result is the same: gridlock, with lower risk of radical legislation.

The approach to Brexit talks is a wildcard, but that was always the case, even if May won a commanding majority. So far, all we've seen from both EU and British politicians involved is posturing, and it's unknowable now how any of these leaders will act once they get down to brass tacks. Plus, for markets, Brexit is so widely discussed and slow moving that it likely lacks material, market-moving surprise power. Hence domestic legislation is likely the swing factor, and having a government that can't pass much -- regardless of its leadership or composition -- should relieve U.K. stocks.

If final results shift radically from exit polls, we'll revisit this take. But as long as gridlock appears likely to prevail, U.K. stocks should be in good shape.

[i] Or rather, 12-ish. Northern Irish MPs from Sinn Féin, which supports a reunified Ireland and doesn't recognize British sovereignty over the north, abstain from the U.K. Parliament as a matter of conscience. Hence to form a government, the main party/coalition would need a majority of total seats ex. Sinn Féin, which will probably be around 323.

[ii] Anything is possible, but it is difficult to envision her remaining in her post if the Tories lose their majority, even if they remain in government, as it was her decision to call the snap election and her campaign gaffes that many presume cost the Tories votes.

Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit www.fisherinvestments.com.

The content contained in this article represents only the opinions and viewpoints of Fisher Investments editorial staff. It should not be regarded as personalized financial advice and no assurances are made the firm will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

What's Hot

Alibaba, day two notes: After a monster run in its stock on the heels of a bullish investor day, Alibaba (BABA) founder Jack Ma saw his net wealth rise $8.5 billion to $41.8 billion. He is Asia's richest man, according to the Bloomberg Billionaires Index.

Why not stay long this tech stock, momentum lives on: Chipmaker Nvidia (NVDA) is the best-performing S&P 500 component this quarter. The stock is up a robust 54% in June as Wall Street has become even more bullish on the company's prospects.

Must watch digital TV: Apple (AAPL) CEO Tim Cook delivered a brief, but thought-provoking comments speech at MIT on Friday.

ROBOTS: There really isn't any additional information needed on this one. Softbank Corp. (SFTBY) has struck a deal to pick up Alphabet's (GOOGL) robot-maker Boston Dynamics. TheStreet shows you inside of five seconds what Boston Dynamics does -- it's really cool stuff.