Conservatives Won U.K. Election; Uncertainty with EU and Scotland

U.K. ElectionOn Friday, May 8, 2015, the final result of the U.K. election was announced. David Cameron’s Conservative Party won 330 seats, an increase of 24. The Labor Party lost 26 seats and now has 232. The Scottish National Party won 56 seats out of Scotland’s 59—a dramatic increase of 50. As a result, markets warmed to the Conservatives’ victory.

U.K.’s Election Results Welcomed by the Markets

The U.K. stock market embraced the Conservatives’ victory on Friday. The FTSE 100 Index rose 2.32% to 7046.82. The FTSE 250, an index more indicative of the U.K. economy, jumped up by 2.80% to a record high of 17935.93.

The response was also positive on the currency market. During Friday’s trading, the Sterling broke above $1.55 against the dollar; and rose to more than €1.382 against the euro, marking the sharpest increase against the euro in six years.

Bond investors also seem to welcome the victorious party. Prices on British Bonds soared, pushing yields on 10-year government bonds down to 1.8 %.

Possibility of U.K. Leaving the EU

As the Conservatives gain more power through this election, it seems the U.K. might be thinking of leaving the European Union. Britain’s exit from the EU could have substantial economic impact.

Note: the European Union is an economic and political union of 27 member states mostly located in Europe. The eurozone is an economic and monetary union of 17 EU members that have adopted the euro as their common currency. Britain is a member of EU but is not part of the eurozone.

According to a study in Germany, the U.K. leaving the EU is “a losing game for everyone in Europe from an economic perspective alone—particularly for the U.K.” The biggest loser, the study suggests, will be the U.K. itself. Leaving the EU could cost the U.K. around £215 billion, or 14% of the country’s gross domestic product (GDP). (Source: Bertelsmann Stiftung, last accessed May 10, 2015.)

If the U.K. leaves the EU, there will certainly be costs to other countries, too. The size of these costs would depend on the trade agreements the future independent U.K. has with these countries. For now, there is significant uncertainty surrounding the topic.

Scotland Leaving the U.K.?

Despite the winning of the Tories, this U.K. election should also be celebrated by the Scottish National Party (SNP). It has won 56 out of 59 seats in Scotland, a remarkable turnaround of events.

Rising to a party with the third-largest power in parliament, the possibility of Scotland leaving the U.K. is gaining steam.

Many Scottish wanted to leave Britain, and tried to do so by having a vote in 2014. Although that did not turn out successfully at the time, SNP’s dominating victory in Scotland in the recent U.K. election could bring future referendums on this subject.

What’s Ahead for the U.K.

The U.K. election results are positively accepted by markets, at least for now. Indeed, the majority victory by the Conservative Party should provide short-term relief to businesses. However, nothing can be said about the future.

The possibility of the U.K. leaving the EU and Scotland leaving the U.K. makes long-term forecasting impossible. It is unlikely that Britain will leave the European Union. The probability of Scotland leaving the U.K. is much higher after this election than it was a year ago.

Note that a lot of U.S. corporations have businesses in Britain. And all major U.S. banks have a presence in the U.K. With huge long-term uncertainty hovering in the U.K., investors should pay close attention to how businesses change their strategies and adapt to the new situations.