Following a dreadfully poor campaign by Theresa May and the Conservative Party in the run up to yesterday’s General Election, we’ve woken up to the news that the UK will once again face the prospect of a Hung Parliament.
Going into the poll, markets had rather lazily been relying upon the opinion polls, which continued to point to a Conservative win, so this unexpected development is likely to create some short-term volatility in stock, bond and particularly currency markets. But, if we look back to the 2010 election, the markets calmed down pretty quickly in the following weeks as economic and company fundamentals reasserted themselves.
Suspected areas of volatility
The markets have already been able to express a view on the Hung Parliament result by trading sterling overnight in Asia and the pound has lost around 1.5% against the dollar, falling to around the $1.275 mark, retracing some of its recent gains. In some respects, that could have been a lot worse and that may reflect the electorate’s clear rejection of the Prime Minister’s so-called ‘Hard Brexit’ stance.
We are likely to see some initial market volatility today 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 the election result throws at investors.
Any talk of a softer Brexit could help financial services stocks and banks, while any marked pound weakness could put the spotlight back on those overseas plays, exporters and dollar earners who did well in the wake of the EU referendum result but have lagged the FTSE All-Share’s more recent advances – the miners, the oils and US-exposed names such as Ashtead and Wolseley.
In the very short term, the identity of the next Prime Minister and the parties who form any coalition will go a long way to shaping sentiment, in addition to the rate at which any negotiations are concluded.
We must now wait to see who the new prime minister will be – and a decision is needed pretty quickly because the elephant in the room remains Brexit.
Whoever enters Number 10 Downing Street as the new PM now has two years to negotiate a deal with the EU – or decide whether to walk away without one, and perhaps rely on the World Trade Organisation (WTO) status that already serves us well in our trade relations around the world.
Some investors will think the stock market is too relaxed about what Brexit may mean for the economy and UK plc’s earnings power. They might fight shy of British stocks or the pound, or at least sectors with a hefty domestic bias, such as construction, property, retailers and financial services providers.
Others, however, will think there is too much gloom about what Brexit may mean and there could be an upside surprise. In that case, these investors may prioritise British stocks over overseas-quoted ones, or those dollar-earners and UK firms with big overseas exposure, such as miners and engineers, preferring the home comforts of banks, construction, retail and real estate.
It’s only short-term
Investors need to remember that in the long term it is not politics that determines company valuations. Ultimately, it is profit and cash flow that drive share prices in the long term so investors should not let short-term political noise divert them from their investment strategy.
Any political risk to markets is generally short-term, and well diversified portfolios across many asset classes will help with the short term volatility. We have structured our portfolios with the utmost of diversification, as investors are not looking at short term periods of days, weeks or months, but overall medium to long term. If the results of the Election have got you thinking about the safety of your investments, get in touch.