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U.K. Conservative Party’s loss weighs on pound, markets

U.K. Prime Minister Theresa May leaves No. 10 Downing Street with her husband to meet Queen Elizabeth II.

The U.K. Conservative Party, led by Prime Minister Theresa May, unexpectedly lost a majority in Thursday's general election, sending the pound sterling lower and creating market uncertainty ahead of the start of Brexit negotiations.

Executives at money management firms said the result of the elections will affect markets to a lesser extent but agreed it would impact the pound. The currency fell 1.77% against the dollar and 1.62% against the euro Friday. The FTSE 100 fell in morning trading, but later recovered and was up 1.04% by the end of the day.

“The pound dropped almost 2%, but after the initial Brexit vote last year, it collapsed by 12%, so this latest fall is relatively minor,” said Lukas Daalder, chief investment officer of Robeco's investment solutions group. “The lower pound will help U.K. exporters, so the FTSE won't wobble by much, and I don't expect European stocks to be much impacted. In the grand scheme of things, it's not that shocking.”

Richard Colwell, head of U.K. equities at Columbia Threadneedle Investments agreed: “The U.K. market has been out of favor with international investors for some time. Asset allocation to U.K. equities is already as low as it was in 2008 at the height of the banking crisis, so there is no sense of hot money leaving the market.”

Following their defeat, Conservatives will be forced to form a coalition government. In turn, the U.K. could take a softer stance during Brexit negotiations because all potential partners are more likely to support free movement of labor and access to the European Union's single market as part of a new deal with the bloc. There is a possibility that Ms. May will resign as prime minister, which could also delay the negotiation process.

“We await further clarity on the results, but we believe this outcome will complicate negotiations on the U.K.'s exit from European Union,” Goldman Sachs Asset Management said in a note to clients. “We expect a period of uncertainty that could weigh on U.K. assets and add to economic headwinds.”