You think we’d be used to surprise political outcomes by now, but I don’t believe anyone looking at the polls six weeks ago when Theresa May called a snap election expected today’s result.
Initial reactions have been very mixed. Currency is so far taking the majority of the strain and it’s hard to gauge where the pound will go from here. It will be largely determined by the confidence (or not) of international investors in the UK economy and whether they start withdrawing overseas money now that our Brexit outcome looks even more uncertain.
Broadly, this morning, we are seeing two opposing views – which highlight the deep division, if you like, that our country seems to be facing:
So far today, the UK stock market has carried on regardless – just as we’ve seen after other major political events around the world in the past year. Uncertainty could now put a lid on further highs, though.
Getting more granular, we are seeing very similar patterns to those after the Brexit vote nearly a year ago. Large companies, as represented by the FTSE 100 index, are up this morning, boosted yet again by a weaker pound that will make their overseas earnings worth more when converted back into sterling. The medium and smaller-sized firms of the FTSE 250 index, which are more affected by the local economy, again fell.
Although the FTSE 250 recovered quite well from its initial drop last year and has actually performed well over the past 12 months, this new uncertainty may bring fresh challenges. The lower pound has already translated to rising inflation in the UK, which is now feeding through to reduced consumer spending – which is not great news for our domestic earners.
UK commercial property may also take a hit as the outlook for office space, in particular, again weakens.
So far there has been minimal impact on UK government bonds (gilts). Higher inflation is not good news for bonds, so gilt yields are up slightly on this morning’s news. (Remember, bond yields rise when their prices fall.) But ongoing uncertainty could see the Bank of England keep interest rates low in a bid to boost economic growth and in this environment, gilts may hold steady at least.
All up, I’d say don’t chase any knee-jerk movements in asset prices. As we’ve seen multiple times in past year, these can reverse quickly and leave you poorly positioned for the longer term. We generally advocate a focus on funds and managers that look at long-term prospects for individual companies and don’t get too swept up in shorter-term market hype.
A brief note on your global investments too. The US treasury bond market was little changed in Asian trading, which signifies that the UK election outcome is not considered a global risk-off event. So, the events of last night and the coming months aren’t likely to strongly affect international markets in and of themselves.
That said, if sterling falls again, UK investors may see the same kind of boost to their global fund returns as they saw last year when the pound tumbled.
European markets, specifically, have been looking more positive since Emmanuel Macron’s win in the French election – reflecting the budding economic recovery there and a bit less political uncertainty.
Depending on your optimism for the continent through the Brexit process (and its own ongoing national election cycle, which includes Germany and now potentially even Italy this year!), European equities may be one of the few developed markets in the world offering reasonable valuations and growth prospects right now.