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Tired of elections? - Here's another

1/5/2017

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The Prime Minister took most people by surprise when she announced a snap General Election for the 8th June. This also took markets by surprise and if there is one thing markets don’t like it is uncertainty, it generated a period of increased volatility, especially in UK markets.

The FTSE 100 finished the day 2.5% down and the sudden impact of uncertainty undoubtedly put investors on edge, re-evaluating strategies and considering a more cautious approach. On the flip-side sterling, benefited, moving up 2.2% in the same period.

As has been highlighted in previous articles the pound and large company stocks are linked heavily. A falling pound has been good news for large UK large-caps such as those on the FTSE 100 because a large amount of their revenue comes from overseas. Once converted back into pounds they are effectively getting more for their dollar, euro etc.

This has been a continuing theme since the Brexit vote last year, uncertainty dragging the value of the pound downwards thereby increasing the share prices of the largest global firms in the UK. Further volatility can be expected in currency, particularly in respect of the EUR/GBP and GBP/USD, as well as in the major equity UK indexes, between now and the election.

There is also bound to be much media speculation and political noise which may affect investor views. Some believe that a Tory landslide could initiate a hard Brexit. This might then result in complex new trade relations between UK and European firms potentially reducing movement of cheap labour into the UK to service certain businesses, such as the entertainment and hospitality sector.

Or it may give the UK government a stronger hand when negotiating those trade deals for UK firms. Any other kind of election result might make it more difficult to attain such a severe cut-off from the EU or secure good deals for UK companies. In summary, many see this Election as a precursor to the Brexit negotiations which could determine the mandate the government has with which to enter those negotiations. We will see.

Over the coming weeks, investors will be eagerly tracking all manner of media sources and economic reports as they search for clues as to how the election may pan out and, more importantly, how it will affect currency values and stock prices.

History tells us that financial markets can certainly experience more volatility but that doesn’t necessarily predict the post-election market movements. We have two good recent examples of this. Firstly, the Referendum last summer where commentators expected a significant crash in markets , so far, we’ve seen anything but. Secondly, the US Election. The Trump victory initially dented investor confidence and US markets struggled but they very quickly bounced back and have been steadily rising ever since.

It is very difficult to be an informed specialist investor on all matters related to something as large and significant as an election. Many factors can influence it and many factors will no doubt continue to shape investment markets.

We see a continued over-riding priority which we have adhered to previously. That is, having a flexible, fluid, diverse portfolio which can position itself as best as possible given the known elements. An example of this is having UK exposure which focuses on firms which have a more domestic bias and therefore be less affected by the currency swings, affecting revenue. There are of course many more elements to this but so long as continued attention is given to the underlying elements, the ship can follow its course through these periods of uncertainty.

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    Author

    Director, David Hardman has over 20 years experience in financial services.

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