Business leaders expressed concern at the outcome of the General Election with the CBI calling it a “serious moment”.
Amid calls for a settlement on who governs, the pound fell and there were concerns that the Brexit talks would be delayed, although this looked unlikely after Mrs May’s “let’s get to work” speech on the Downing Street steps and her re-appointment of David Davis as Brexit Secretary.
The slide in the pound saw the FTSE 100 open up more than 1% or about 80 points as it normally rises when sterling falls, driven by constituents with overseas earnings. It closed 77.35 (1.04%) higher at 7,527.33.
But domestic stocks such as Next and Barratt Developments were hit hard amid expectations that consumer spending would be squeezed by higher import costs.
Housebuilders, including Taylor Wimpey and Persimmon, saw falls of up to 5%, but recovered slightly to finish between 2%-3% down.
Retailers were also big fallers, but pared loses in late trading. Next closed 1.75% down, and Marks and Spencer closed 1.8% lower. Royal Bank of Scotland closed down 2.4%.
Investors had been expecting a clear victory for Theresa May’s Conservative Party.
However, analysts noted that the pound’s fall was less emphatic than its plunge after the Brexit vote last June, when it sank by more than 10%. Some said this might reflect the diminishing prospect of a “hard” Brexit. There is also speculation of an easing in the austerity policy.
CBI director-general Carolyn Fairbairn (pictured above) said: “This is a serious moment for the UK economy. The priority must be for politicians to get their house in order and form a functioning government, reassure the markets and protect our resilient economy.
“For the next Government, the need and opportunity to deliver an open, competitive and fair post-Brexit economy that works for everyone across all our nations and regions has never been more important.”
Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “With the clock ticking on Brexit, the next UK Government’s key short term priority must be to secure a deal on the rights of EU nationals to live and work in the UK. These workers are essential to Scotland’s businesses and an early deal would go a long way to ensuring stability of the talents they need to succeed and grow.
“I will also be looking to open up a dialogue with the UK Government on its medium to long term plans for migration.
“Businesses also need the reassurance that they will not be faced with new and unplanned tax burdens, and that the Government will press ahead with its plans for an Industrial Strategy, which must crucially take full account of the role and powers of the Scottish Government and other devolved administrations.”
The election result is also raising questions about key Tory party policies on a range of issues from pensions to the bond market.
Russ Mould, investment director at AJ Bell, said: “This unexpected development is likely to create some short-term volatility in stock, bond and particularly currency markets.
“We are likely to see some initial market volatility but once that has calmed down, hopes for a softer, less combative approach may help the pound and also the UK stock market in the face of the uncertainty which the election result throws at investors.”
In 2010, the FTSE 100 fell 2.6% the day after the election on 6 May threw up a hung Parliament.
The index then rallied 5.2% on the following Monday, when incumbent Prime Minister Gordon Brown resigned and overall recorded a gain of 2.3% from the day before the ballot to the announcement of the Conservative-Liberal Democrat coalition on 12 May.
In contrast, the UK Government bond (or Gilt) market wobbled as the yield on the benchmark 10-year Gilt rose to 3.78% from 3.74% and prices therefore fell slightly.
Sterling lost between 1.5% and 2.0% against the dollar and euro on 7 May 2010 as the hung result became clear but losses came to barely 0.5% on each count by the time David Cameron and Nick Clegg had puled together their Coalition.
Mr Mould added: “The scope for short-term swings is clear – but note that markets calmed down pretty quickly as economic and company fundamentals reasserted themselves.”
Over the 12 months following the 2010 Election, the FTSE rose 13.6% while the 10-year Gilt yield fell (so price rose) from 3.74% to 3.40%, helped by the Bank of England’s Quantitative Easing bond-buying programme. The pound gained 10% on the dollar and lost 4% against the euro in the 12 months after the poll.
Richard Parkin, head of pensions policy at Fidelity International, said: “Strategically it seems that any reform of pension tax relief will remain on the Conservative back burner though economic circumstances may force it on to the agenda.
“Following through on the Cridland recommendations on State Pension Age and the proposed abolition of the triple-lock now look difficult and given the severe reaction to the long term care funding proposals we can expect little here any time soon.”
Commenting on what a hung parliament means for the triple lock, winter fuel payments and social care, Ed Monk, associate director for Personal Investing at Fidelity International, said: “The hung parliament leaves no party with a mandate to deliver on its agenda for pensioners.
“The numbers suggest the Conservatives are the only party that could lead a government in parliament but this only looks workable with the full support of the Democratic Unionist Party in Northern Ireland. The DUP manifesto included commitments to the state pension Triple Lock and Winter Fuel Payments, so it feels unlikely the Conservatives will try to push through with scrapping these.
“The DUP has also expressed support for the WASPIs (Women Against State Pension Inequality) – those women born in the 1950s who have been campaigning for protection against rises in their state pension age.
“Theresa May’s manifesto plans on social care were also highly contentious in this campaign and it would be a brave leader, whether that’s Theresa May or anyone else, that takes these forward either.
“There may be relief that these unpopular measures have been avoided but underlying each are genuine pressures that the government, whoever that is, needs to tackle.”