With the votes having been counted for 649 of the 650-seats in the House of Commons, the ruling Conservatives have 318 seats, a net loss of 12 seats. Labour, the main opposition party, won 261 (+32). Even if the Conservatives win the 650th seat, they will at best be 7 seats short of an absolute majority and 5 seats short of a working majority – a hung parliament. Prime Minister Theresa May announced that the Conservatives would form an informal alliance with the Northern Irish DUP which won 10 seats. The DUP would support the Conservatives in key votes, likely in exchange for some say on government policy. Theresa May’s future seems secure for now but medium-term I would expect her position to come under close scrutiny and a party-leadership battle remains a distinct possibility. Sterling has weakened about 1.5% post election, in line with my and market expectations. The Conservatives’ loss of seats raises serious questions about Theresa May’s leadership, her decision to trigger early elections and the risk of a party leadership battle to oust her. Moreover, markets will likely remain concerned about the shelf-life of a Conservative-DUP alliance and its ability to push legislation through parliament. However, I also see scope for Sterling’s downturn to fade and even reverse in due course. To be clear, a V-shaped Sterling recovery would likely remain elusive. Two key questions pertain to the likelihood of this new Conservative-DUP formal alliance 1) securing an advantageous EU deal and 2) opting for a “hard” or “soft” version of Brexit. If anything, the past two months have reinforced my view that the government is ill-equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with the EU and non-EU partners. The composition of parliament and its take on Brexit leave Theresa May in somewhat of a bind. The government may therefore have little choice but to seek support from some of the 322 opposition MPs who on the whole favour the UK remaining in the EU or at the very least a “soft” version of Brexit. So while I do not expect a second referendum on the UK’s membership of the EU, I do see a possibility of the government toning down its rhetoric and potentially opting for a softer version of Brexit – a development which UK financial markets would welcome in my view. At the very least, this election has further weakened the idea that nationalist parties in Europe are gaining the upper hand.

1. 1
UK Election: Clutching defeat from the jaws of victory
With the votes having been counted for 649 of the 650-seats in the House of Commons, the
ruling Conservatives have 318 seats, a net loss of 12 seats. Labour, the main opposition
party, won 261 (+32).
Even if the Conservatives win the 650th seat, they will at best be 7 seats short of an
absolute majority and 5 seats short of a working majority – a hung parliament.
Prime Minister Theresa May announced that the Conservatives would form an informal
alliance with the Northern Irish DUP which won 10 seats. The DUP would support the
Conservatives in key votes, likely in exchange for some say on government policy.
Theresa May’s future seems secure for now but medium-term I would expect her position
to come under close scrutiny and a party-leadership battle remains a distinct possibility.
Sterling has weakened about 1.5% post election, in line with my and market expectations.
The Conservatives’ loss of seats raises serious questions about Theresa May’s leadership,
her decision to trigger early elections and the risk of a party leadership battle to oust her.
Moreover, markets will likely remain concerned about the shelf-life of a Conservative-DUP
alliance and its ability to push legislation through parliament.
However, I also see scope for Sterling’s downturn to fade and even reverse in due course.
To be clear, a V-shaped Sterling recovery would likely remain elusive.
Two key questions pertain to the likelihood of this new Conservative-DUP formal alliance 1)
securing an advantageous EU deal and 2) opting for a “hard” or “soft” version of Brexit.
If anything, the past two months have reinforced my view that the government is ill-
equipped, ill-prepared and lacking in institutional capacity to negotiate complex deals with
the EU and non-EU partners.
The composition of parliament and its take on Brexit leave Theresa May in somewhat of a
bind. The government may therefore have little choice but to seek support from some of
the 322 opposition MPs who on the whole favour the UK remaining in the EU or at the very
least a “soft” version of Brexit.
So while I do not expect a second referendum on the UK’s membership of the EU, I do see
a possibility of the government toning down its rhetoric and potentially opting for a softer
version of Brexit – a development which UK financial markets would welcome in my view.
At the very least, this elections has further weakened the idea that nationalist parties in
Europe are gaining the upper hand.

2. 2
Conservatives win 318 seats, Labour 261 seats – Hung Parliament
With the votes for yesterday’s election having been counted for 649 of the 650-seats in the House of
Commons (lower house of parliament), the ruling Conservatives have 318 seats, a net loss of 12 seats (see
Figure 1). The other big losers were the Scottish National Party (SNP) and the Northern Irish Social
Democratic & Labour Party (SDLP) and Ulster Unionists which lost respectively 19, 3 and 2 seats.
Labour, the main opposition party, won 261 (+32). The other winners were the Liberal Democrats and the
Northern Irish Sinn Fein and Democratic Unionist Party (DUP) parties which gained respectively 3, 3 and 2
seats. The Speaker of the House of Commons, a Conservative who does not vote in parliament, also
retained his seat.
Figure 1: All change in the 650-seat House of Commons
Source: House of Commons, Electoral Commission, BBC
Note: (1) Votes have yet to be counted for one constituency, (2) from outgoing House of Commons; (3) Does not add up to
100% as smaller parties (which did not get seats) excluded; (4) From May 2015 generalelection
Party Note Seats in New
House of
Commons (1)
Change
in Seats
(2)
% of seats
won (1)
% of
National
Vote (3)
Change
(percentage
points) (4)
Conservatives Short of majority 318 -12 49.0 42.4 5.6
Labour Short of majority 261 32 40.2 40.0 9.5
SNP Scottish Party 35 -19 5.4 3.0 -1.7
Liberal Democrats 12 3 1.8 7.4 -0.6
DUP Northern Ireland Party 10 2 1.5 0.9 0.3
Sinn Fein Northern Ireland Party 7 3 1.1 0.7 0.1
Plaid Cymru Welsh Party 4 1 0.6 0.5 -0.1
Green 1 0 0.2 1.6 -2.2
Ulster Unionists Northern Ireland Party 0 -2 0.0 0.3 -0.1
SDLP Northern Ireland Party 0 -3 0.0 0.3 0.0
UKIP 0 0 0.0 1.8 -10.8
Independents 0 -5 0.0 0.0 -0.1
Speaker Conservative but
doesn’t vote in
parliament
1 0 0.2
Total 649 100.0 98.9
Outcome of 8th June 2017 UK General Election

3. 3
Conservatives short of absolute and working majorities
Even if the Conservatives win the 650th
seat, they will at best be 7 seats short of an absolute majority and 5
seats short of a working majority, calculated as Conservative Members of Parliament (MPs) less all other
parties but excluding MPs who typically don’t vote in parliament1
(see Figure 2).
Figure 2: Conservatives short of absolute and working majorities
Source: House of Commons, Electoral Commission
Note: Number of total seats on offer fluctuated in elections from 1970 to 2005 due to boundary changes but has been
constant at 650 since 2010 election * Minority governments
Conservatives forge informal alliance with Northern Irish DUP
No party won a majority and therefore the UK has a hung parliament. Theresa May announced this
morning, after having seen Her Royal Majesty the Queen, that the Conservatives would form an alliance
with the DUP which has ten seats. This informal coalition would have 328-329 seats2
– a wafer-thin majority
of 2-3 seats and a working majority of 13-15 seats. The DUP would not formally be part of the government
nor have ministerial positions in the new cabinet but would support the Conservatives in key parliamentary
1. These are the Speaker of the House (who resigns from his/her party, at present the Conservative Party), the three
Deputy Speakers (currently two Labour, one Conservative) who don’t resign from their parties and the four Sinn Fein
MPs who do not sit in Parliament as they do not recognise its legitimacy. 330 minus 313 (320 minus 3 minus 4)
equates to 17-seat government majority.
2. Depending on whether the Conservatives win the last seat for which votes have not yet been counted.
-50
0
50
100
150
200
1970 Feb 74
*
Oct 74 1979 1983 1987 1992 1997 2001 2005 2010 * 2015 2017 *
House of Commons working majority in previous general elections (number of seats)
Conservative Party
Labour Party
Average (1970-2015):72 seats

4. 4
votes, likely in exchange for some say (at the margin) on government policy including Brexit negotiations
(see below) – what is termed “Confidence and supply” votes.
This is in line with my view that should the Conservatives lose their majority “few, if any, of the other parties
would likely have both a significant number of seats and a natural affinity with the Conservatives” and that
while “the DUP and Ulster Unionists have given their tacit support to Brexit and could conceivably side with
the Conservatives in key votes, they they would not formally join a ruling coalition” (see UK General
Election Scenario Analysis Impact on Policy, Theresa May and Sterling, 7 June 2017)
Theresa May’s future – Secure for now, far less so medium-term
While opposition parties have called for Theresa May to resign following yesterday’s election, within the
Conservative Party there have so far only been rumblings about Theresa May’s position as party leader
and Prime Minister. This is broadly in line with my expectation that in the event of Conservatives failing to
win a working majority, “The near-term risk of the Conservatives holding a party-leadership election may,
somewhat perversely, be more modest than in Scenarios 4-6. The reasoning is that the Conservatives
would be under pressure to beat Labour in forming a majority coalition government and may not want the
added distraction of a leadership-election which could leave the country rudderless.
In the medium-term, however, I would expect Theresa May’s position to come under close scrutiny and a
party-leadership battle remains a distinct possibility.
Sterling drops post election result but scope for modest recovery medium-term
Sterling has depreciated in wake of the election result, with the Nominal Effective Exchange Rate (NEER)
down about 1.5% according to my estimates (see Figure 3). The GBP/EUR cross has weakened about
1.2% at time of writing while GBP/USD is down about 1.5%.
This is line with my scenario analysis that “In the event of neither Labour nor the Conservatives winning a
majority – a hung parliament – the immediate knee-jerk reaction would likely be a sharp sell-off in Sterling
and jump in volatility. Sterling could conceivably weaken to (and below) the low-end of its multi-month
range” (see Scenario 7 in UK General Election Scenario Analysis Impact on Policy, Theresa May and
Sterling, 7 June 2017).
The Conservatives’ loss of seats raises serious questions about Theresa May’s leadership qualities, her
decision back in April to trigger early elections and the risk of a party leadership battle to oust her.
Moreover, markets will likely remain concerned about the shelf-life of a Conservative-DUP alliance and its
ability to push legislation through parliament (i.e. policy paralysis). This concern is likely to be particularly
acute with regards to a minority government’s ability to successfully negotiate a favourable deal with the EU
– a body with arguably vast institutional capabilities.
However, I also see scope for Sterling’s downturn to fade and even reverse in due course. This
Conservative-led alliance will likely have to adopt a more consensual stance on policy, including Brexit.

5. 5
This may in turn help mitigate the risk of the UK walking away from EU negotiations without a deal, even if
transitional, in place. At the very least it may force Theresa May to be more transparent and detailed in her
presentation of policy.
To be clear, a V-shaped Sterling recovery would likely remain elusive. After all financial markets generally
distrust inherently less stable and predictable coalition governments, let alone an unprecedented informal
alliance between a minority Conservative Party and a Northern Irish Party. Moreover, this minority
government will have to deal with a trifecta of challenges – lacklustre economic growth, likely tortuous and
drawn-out EU negotiations and the omnipresent threat to domestic security. However, the seemingly-held
assumption that a hung parliament would usher in a protracted period of acute Sterling and financial market
weakness may well be challenged.
Figure 3: Sterling NEER has dropped 1.5% in the wake of the UK election result
Source: Bank of England, investing.com
What next for Brexit?
The British government and EU leaders are due to start negotiations in ten days time about the terms and
conditions of the UK’s exit from the EU (see Figure 4) and in due course negotiations about the terms and
conditions of the UK’s new deal with the EU. The two main questions pertain to the likelihood of this new
Conservative-DUP formal alliance 1) securing an advantageous EU deal and 2) opting for a “hard” or “soft”
version of Brexit.
90
95
100
105
110
115
120
Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17
Sterling Nominal Effective Exchange Rate (23 April 2010 = 100)
Refere ndum date confirmed
Refere ndum
"flash crash"
Theresa May accounces
early election7 May general elections

6. 6
1. Securing an advantageous EU deal and
I argued in UK Election Special – When Two Tribes Go To War (2 June 2017) that the size of the
government’s majority would have little bearing on the success of negotiations with the EU. If anything, the
past two months have reinforced my view, first set out in The A-team had a plan, the British government
has a nebulous goal (13 December 2016) that the government is ill-equipped, ill-prepared and lacking in
institutional capacity to negotiate complex deals with the EU and non-EU partners.
Figure 4: A very busy domestic (and European and US) political and economic calendar
Source: Electoral Commission, UK Government, House of Commons, European Council, ECB, Federal Reserve
2. Soft or Hard Brexit or something in the middle?
Theresa May made clear in her post-election speech that her government would respect last June’s
referendum result and continue with its plans for the UK to leave the EU in March 2019. Conservative MPs
have in the past expressed a broad spectrum of views with regards to Brexit. With the exception of Kenneth
Clarke, all voted in favour of the Brexit bill back in February but a sizeable number did so reluctantly given
that their constituents had voted in favour of remaining in the EU in the 23rd
June referendum.
The DUP has in the past given its tacit support for Brexit so on paper an informal Conservative-DUP
alliance with 328 seats would have the required working majority to push through parliament policies which
take the UK out of the EU (see Figure 5). However, there are a number of stumbling blocks. First, the DUP
has in the past expressed a preference for Northern Ireland to maintain free-trade arrangements with the
Republic Ireland, which would in theory be incompatible with the UK no longer being an EU member.
Moreover, 30 or so Conservative bankbenchers are in favour of a “hard” Brexit.
This could leave Theresa May in a bind. If on the one hand she pushes for a “hard” Brexit or even threatens
to walk away from negotiations with the EU without even a transitory deal in place, the DUP may not give
their parliamentary support. On the other hand, if she pushes for a “soft” Brexit – namely UK membership of
11 June 2017 France First round of elections for the National Assembly
14 June 2017 US Federal Reserve policy meeting
18 June 2017 France Second round of elections for the National Assembly
19 June 2017 UK-EU Brexit negotiations to officially start
24 Sep 2017 EU German Federal elections
29 March 2019 UK-EU UK membership of the EU formerly ceases
May 2020 UK Original date for general elections (now brought forward to 8 June 2017)
May 2022 UK Next general elections (assuming government does not call early elections again)

7. 7
the Customs Union and a tapered budget contribution to the EU budget in exchange for increasing control
over EU immigration into the UK – she may run into opposition from rebel Conservative MPs.
The government may therefore have little choice but to seek support from some of the 322 opposition MPs
who on the whole favour the UK remaining in the EU or at the very least a “soft” version of Brexit. This
would likely mean Theresa May adopting a more conciliatory approach to the UK’s exit from the EU. So
while I do not expect a second referendum on the UK’s membership to the EU, I do see a possibility of the
government toning down its rhetoric of “no deal is better than a bad deal” (at least behind closed doors with
EU leaders) and potentially opting for a softer version of Brexit – a development which UK financial markets
would welcome in my view.
At the very least, this election has further weakened the idea that nationalist parties in Europe are gaining
the upper hand (see 2017 French elections – They think it’s all over…it isn’t, 11 May 2017). Conservatives
have suffered an embarrassing debacle while the pro-Brexit United Kingdom Independence Party (UKIP)
won only 1.8% of the national vote versus 12.6% in the 2015 election (see Figure 1).
Figure 5: Conservatives may struggle to gain support for Brexit legislation without opposition support
Source: House of Commons
Party Brexit stance Seats % of seats
Conservatives Mainly pro-Brexit but spectrum of views
from anti-Brexit to 30 eurosceptics
318 49.0
Labour Pro-EU but majority of MPs voted in favour of
bill allowing government to trigger Article 50
261 40.2
SNP Pro-EU 35 5.4
Liberal Democrats Pro-EU 12 1.8
DUP Tacit support for Brexit 10 1.5
Sinn Fein Pro-EU 7 1.1
SDLP Pro-EU 0 0.0
Plaid Cymru Pro-EU 4 0.6
Green Pro-EU 1 0.2
Speaker 1 0.2
Total 649
Composition of House of Commons

8. 8
Conservatives won 42.4% of national votes but “only” 49% of seats
The Conservatives won 42.4% of the national vote, which was slightly higher than the recent historical
average of 40% (see Figure 6). As a result of the first-past-the-post electoral system3
, the Conservatives
won a higher 49% of the 650 seats.
Figure 6: Conservatives won decent share of national vote but failed to translate into large number of seats
Source: House of Commons, Electoral Commission
Note: C denotes Conservatives,L denotes Labour; * Conservatives were short of a majority (306 seats) and formed a
ruling coalition with Liberal Democrats
However, the 6.5 percentage point (pp) gap between the two measures was the lowest in recent history
and well below 15.6pp average (see Figure 7). This would suggest the Conservatives fought a poor tactical
campaign. In effect, for the first time in decades, the election outcome resembles that of an election run
under a Proportional Representation (PR) electoral system (in a pure PR of course the gap would be nil).
3. Under a winner-takes-it all, first-past-the-post electoral system a candidate is elected MP regardless of his/her
margin of victory
30
35
40
45
50
55
60
65
70
1979 C 1983 C 1987 C 1992 C 1997 L 2001 L 2005 L 2010 C* 2015 C 2017 C
Votes won (Average: 40%) Seats won (Average 56%)
Winning party in prior elections: Votes and seats won (% of total)

9. 9
Figure 7: Gap between share of seats and share of votes fell to a record low in yesterday’s election
Source: BBC, House of Commons, Electoral Commission
Turnout – Above average but scant consolation
Voter turnout, defined as the share of valid votes as a percentage of registered voters, was 68.7% based
on preliminary numbers (see Figure 8) – only marginally lower than the historical average despite fears of a
record-low turnout (that record is still held by Tony Blair’s Labour party in the 2001 general election). As a
result the Conservatives won the support of approximately 29.1% of registered voters, slightly higher than
the average – scant comfort to the party or Theresa May in my view.
0
5
10
15
20
25
1979 1983 1987 1992 1997 2001 2005 2010 2015 2017
Winning party in prior elections: Gap beteween share of seats won and share of votes won (percentage points)

10. 10
Figure 8: Voter turnout confounded expectations of record-low turnout
Source: Electoral Commission
Note: * Conservatives were short of a parliamentary majority and formed a ruling coalition with the Liberal Democrats
You Gov got it right, national polls got in partly right
You Gov – the only polling agency which attempted to forecast the election result across all 650
constituencies4
– correctly forecast a hung parliament. Credit where credit is due. Specifically they forecast:
 Conservatives 304 seats (vs 318 actual)
 Labour 266 (vs 261 actual).
 Liberal Democrats 12 (vs 12 actual)
 SNP 46 seats (vs 35 actual).
National opinion polls correctly estimated national support for the Conservatives and Liberal Democrats
(see Figure 9). However, they significantly under-estimated support for Labour by about 5.5pp and to a
lesser extent for the SNP (1pp) while they over-estimated support for UKIP (2.6pp)
4 . Using national polls and analysis of key demographics, past voting behaviour and voter turnout to scale up the
numbers
Prior general elections - Winning party's share of national vote and voter turnout
Year Ruling Party Votes won (%
of valid votes)
Turnout (valid votes as %
of registered voters)
Votes won (% of
registered voters)
1979 Conservatives 43.9 76.0 33.4
1983 Conservatives 42.4 72.7 30.8
1987 Conservatives 42.2 75.3 31.8
1992 Conservatives 41.9 77.7 32.6
1997 Labour 43.2 71.4 30.8
2001 Labour 40.7 59.4 24.2
2005 Labour 35.2 61.4 21.6
2010 Conservatives* 36.1 65.1 23.5
2015 Conservatives 36.9 66.0 24.4
2017 Conservatives 42.4 68.7 29.1
Average (1979-2015) 40.3 69.4 28.1

11. 11
Figure 9: Opinion polls correctly estimated Conservative support but under-estimated Labour support
Source: House of Commons, BBC, BBC Poll Tracker
Note: Opinions polls are 7-day rolling averages and are adjusted for the omission of the four Northern Irish parties, the
Welsh Plaid Cymru Party, other small parties and independent candidates (which in aggregate won 3.5% of the national
vote in the 2015 general election)
My model significantly under-estimated number of marginal seats which Labour won
My own model, based on a number of assumptions, namely the net share of votes which Conservatives
gain from other parties as well as voter turnout, had pointed to the Conservatives winning around 360 seats
and Labour 212 (see UK Election Special – When Two Tribes Go To War, 2 June).
While I had anticipated, correctly it would seem, that the Conservatives would win seats from both the SNP
and UKIP, I had also expected the Conservatives to in net terms to win seats from Labour in marginal
constituencies. The opposite seems to have happened, with Labour successfully taking Conservative seats
in marginal constituencies.
0
5
10
15
20
25
30
35
40
45
50
31/03 07/04 14/04 21/04 28/04 05/05 12/05 19/05 26/05 02/06
Conservatives Labour
Liberal Democrats UKIP
Greens SNP
Votes as % of total - Opinion polls* vs actual (crosses)