Posted: 09 / 06 / 2017

As the results of the 2017 General Election finish on a ‘hung government’, our Chartered Financial Planner, Gareth Rose, FPFS, takes a look at the reactions from Investment Markets.

Take a read below of Gareth’s election summary:

I think Theresa May, may now have a different answer to the question of “what’s the worst thing you’ve ever done?”.

Political upheaval and the UK seem to go hand in hand; 2015 gave us a surprise Conservative majority government; 2016 gave us a surprise referendum and Brexit vote; 2017 completes a hat-trick with a surprise hung parliament.

In this summary, I am not reviewing the campaigns, policies or shortcomings of the political parties, Teresa May’s position or trying to second guess what happens next. Instead, I want to look at how investment markets have reacted to the immediate result and (try) to look ahead to what may come next.

The exit polls released at 10pm last night were the sign of things to come, predicting that the Conservatives would be the largest party but lacking the majority needed to form a Government.

/ Photo credit: The Mirror

The Pound dropped almost immediately following the exit poll, falling from US$1.295 down to US$1.275, where it pretty much stayed during the night. Although this is higher than the US$1.255 when the election was called on 17th April, this is mainly due to the weakness in the US Dollar over that period. Against other currencies such as the Euro and Japanese Yen, Sterling is now weaker than when the election was called.

Sterling has recovered some ground against the US Dollar currently (10.00am) standing at US$1.27. The only thing we can say for sure on currency markets is to expect volatility in the future. The UK’s position on a Hard Brexit may now have to change. This could be good for Sterling. Alternatively, a weakened UK Government may impact upon Brexit negotiations leading to a worse deal with Europe. This could be bad for Sterling! Close monitoring of the situation is vital in investment portfolio management.

/ Photo credit: The Independent

The FTSE 100 market opened up over 1.0% on the news of a hung parliament. A strange reaction to the situation you may think? However, with the majority of FTSE 100 company earnings coming from overseas, a weakened Sterling means that profits, at least on paper, are higher.

In simple economic terms, higher profits mean a higher share price. Some of the initial gains in the FTSE 100 have now been lost with the market now up 0.77% (10.00am) on opening. In the main, this can be put down to profit taking on some stocks. Across investment portfolios the result of the election will impact on different asset classes in different ways.

Typically, in times of uncertainty there is a “flight to safety”. The result is a sale of “riskier assets” such as equities and a purchase of perceived “safer assets” such as Fixed Interest. Demand in turn pushes up the price of Fixed Interest holdings and yields reduce. However, with many investment experts already saying Fixed Interest holdings are overpriced, will this be the case?

UK equities have initially shown gains. The gains are however mainly attributable to the global based companies with domestic UK based companies suffering. The FTSE 100 may be up 0.77% but this is largely due to its global focus, the more domestic UK based FTSE 250 index currently stands at 0.56% down (10.00am). Volatility can create opportunities.

Fund managers may look to exploit these and returns from actively managed UK based funds could differ significantly. Active management of portfolios and close monitoring are likely to be key to successful portfolio management.

Looking at Global Equities as a whole, the weakening of sterling will produce positive returns for UK investors. This trend has seen significant growth for UK based individuals with overseas equity holdings over the recent years and it looks, atleast initially, that this trend may continue. Political uncertainty over the weeks ahead is unlikely to be beneficial to Sterling and some further gains may be available in overseas markets. Over recent years there has been a shift from UK fund managers towards a more global approach, it could be that this trend continues.

The fallout from the election will impact on investment markets in different ways. The immediate reaction has seen an increase in the FTSE 100 but a fall in the FTSE 250. Sterling has weakened against the major global currencies. UK Government gilts have all increased in price, apart from short dated (less than 12 months) gilts.

How markets react in the weeks following may be different. If a Government is formed, and which political parties it is formed from, will be key.

Will we still have a hard Brexit?
Will another election be called?
Will Theresa May step down?

Further uncertainty is likely and investment markets don’t like uncertainty. Active management and close monitoring of portfolios has always been key, but never more so than now.

So, Theresa, what’s the worst thing you’ve ever done?