Sterling falls on hung parliament shock
Active sectors to watch today
Lessons from 2010
Brexit remains the elephant in the room
Russ Mould, investment director at AJ Bell, comments:
“A dreadfully poor campaign has caught up with Theresa May and the Conservative Party, leaving the UK facing the prospect of a coalition Government for the second time in three General Elections.
“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.
Sterling and sectors to watch today
“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 $1.2750 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 reject 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 which 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 like 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.
Lessons from 2010
“Back in 2010, the FTSE 100 fell 2.6% on the day after the election on 6 May of that year threw up a hung Parliament.
“The index then rallied 5.2% on the following Monday, when incumbent Prime Minister Gordon Brown resigned and overall recorded a gain of 2.3% from the day before the ballot to the announcement of the Conservative-Liberal Democrat coalition on 12 May.
“In contrast, the UK Government bond (or Gilt) market wobbled a little, as the yield on the benchmark 10-year Gilt rose to 3.78% from 3.74% and prices therefore fell slightly.”
“Sterling lost between 1.5% and 2.0% against the dollar and euro on 7 May 2010 as the hung result became clear but losses came to barely 0.5% on each count by the time David Cameron and Nick Clegg had cobbled together their Coalition.”
“The scope for short-term swings is clear – but note that markets calmed down pretty quickly as economic and company fundamentals reasserted themselves.
“Over the 12 months following the 2010 Election, the FTSE rose 13.6% while the 10-year Gilt yield fell (so price rose) from 3.74% to 3.40%, helped by the Bank of England’s Quantitative Easing bond-buying programme. The pound gained 10% on the dollar and lost 4% against the euro in the 12 months after the poll.
“This was as much due to the fundamental backdrop: a recovery from the financial crisis and ultra-loose monetary policy from central banks the world over, in the form of falling (or record-low) interest rates and QE. UK politics, next to that lot, meant relatively little.
“We must now wait to see who the new PM 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 which 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 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 will think that there is too much gloom about what Brexit may mean and that 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.
“Investors need to remember that in the long term it is not politics that determine 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.”