June 06, 2017

Specialist multi-asset investment management firm

UK Election Update

Conservative Party Majority Likely to Increase; Therefore Brexit Means Brexit

In April, British Prime Minister May announced early elections were to be held on June 8th in the UK. PM May was seeking to capture and utilise the unexpected popularity of the Conservative party post the triggering of Article 50 in late March 2017 so as to increase the size of the Conservative party ruling majority within the House of Commons. The current Conservative majority government has amongst the slimmest of majorities, with an absolute majority of just 5 seats and a working majority of 17.

Whilst polls have been more volatile in recent days, it remains our base case (70% probability) that PM May will increase the Conservative party majority at the election to between 50 and 100 MPs. It’s important to note the non-linearity of the UK’s FPTP election system in which just a 10% polling lead in the national vote share can lead to a significant majority of MPs. Our base case scenario will give PM May greater commanding power within both the government and the Conservative party, so as to ensure that a deep and comprehensive free trade agreement can be reached with the EU during negotiations in 2017 H2 and 2018 H1. Such an outcome would see GBP appreciate versus EUR/USD, but it’s also likely Gilts underperform based on higher than expected issuance given a slowdown in fiscal consolidation and the need to finance a significant Brexit divorce bill (around £50bn is our estimate).

We recognise the tail risks of a smaller Conservative majority than at present (10%) and a hung parliament (20%). However, we also note that in each of these scenarios the UK will most likely still exit the EU (albeit potentially after a 2nd referendum in the case of a coalition government).

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In April, British Prime Minister May

announced early elections were to be

held on June 8

in the UK. PM May

was seeking to capture and utilise

the unexpected popularity of the

Conservative party post the triggering

of Article 50 in late March 2017 so as

to increase the size of the Conservative

party ruling majority within the House

of Commons. The current Conservative

majority government has amongst the

slimmest of majorities, with an absolute

majority of just 5 seats and a working

majority of 17.

Whilst polls have been more volatile

in recent days, it remains our base

case (70% probability) that PM May

will increase the Conservative party

majority at the election to between 50

and 100 MPs. It’s important to note the

non-linearity of the UK’s FPTP election

system in which just a 10% polling lead

in the national vote share can lead to

a significant majority of MPs. Our base

case scenario will give PM May greater

commanding power within both the

government and the Conservative

party, so as to ensure that a deep and

comprehensive free trade agreement

can be reached with the EU during

negotiations in 2017 H2 and 2018

H1. Such an outcome would see GBP

appreciate versus EUR/USD, but it’s also

likely Gilts underperform based on higher

than expected issuance given a slowdown

in fiscal consolidation and the need to

finance a significant Brexit divorce bill

(around £50bn is our estimate).

We recognise the tail risks of a smaller

Conservative majority than at present

(10%) and a hung parliament (20%).

However, we also note that in each of

these scenarios the UK will most likely

still exit the EU (albeit potentially after a

2nd referendum in the case of a coalition

government).

Conservative Party Majority Likely to Increase;

Therefore Brexit Means Brexit

Rowena Geraghty

, Sovereign Analyst

UK Election Update

Potential Election Outcome

Likely Market Response

Conservative Majority > 17

• GBP appreciation on the view that a

softer than currently advertised Brexit can

be achieved

• Small-sell off in Gilts as base case is

realised

Conservative Majority < 17

(or Conservative largest party within a hung

Parliament)

GBP depreciation on concerns of exit from

the EU without a deal.

Gilts subject to shifts in sentiment

Labour Largest party within a hung

Parliament

(or a Rainbow Coalition)

GBP appreciation on the increased

likelihood of maintaining EEA membership

Gilt underperformance on much higher

than expected supply in coming years

•

GBP appreciation on the view that a

softer than currently

advertised Brexit

can be achieved

•

Small-sell off in Gilt

s as base case is

realised

•

GBP depreciation on concerns of exit

from the EU without a deal.

•

Gilts subject to sh

ifts in sentiment

•

GBP appreciation on the increased

likelihood of maintaining EEA

membership

•

Gilt underperformance on much higher

than expected supply in coming years

Source: Standish as of June 5, 2017

Election Outcome Probabilities

Source Standish as of June 5, 2017

70%

17%

20%

Conservative Majority >17

Conservative Majority <17

Hung Parliament

Source: Standish as of June 5, 2017

shared employee of Standish Mellon Asset Management (UK) who provides non-discretionary research services to Standish US.

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a

sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security. Similarly, this information is not intended to provide specific

advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish). These views are current as of the date

of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available

sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information. Please contact Standish for

current information about our views of the economy and the markets. Portfolio composition is subject to change, and past performance is no indication of future performance.

BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services

and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon

subsidiary. WP/6-6-17/BR

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