The only certainty is that more surprises are in store

Friday, 9th June 2017 10:58 - by David Harbage

The run-up to this general election has been notable for all the wrong reasons, and will be remembered for the terrorist atrocities in Manchester and London rather than politicians providing guidance on how they would negotiate Brexit.

Perhaps further detail on that subject is expecting too much: certainly the Conservatives felt sufficiently confident of success that they avoided the televised ‘head-to-head’ leaders’ debate and were not prepared to share how thy intended to steer the UK out of the EU with the electorate (on the grounds that it would weaken their negotiating position). By contrast, Labour published a visible, radical manifesto which excited socialists - if unnerving economists – and younger people in particular.

If the outcome of a hung parliament was unexpected, investors might now be asking themselves what they can expect in terms of reaction in the financial markets. As this blog has suggested previously, uncertainty represents a bigger negative than bad news per se and this has been most obviously in a 2% fall in sterling’s worth versus the US dollar. There does not appear a clear political path forward, with a divided electorate leading to an absence of any one party to claim a strong mandate to govern. The media will speculate about the prospect of political pacts or a coalition, the ability to negotiate Brexit (a softer versus harder outcome, or even a second EU referendum), the future leadership of the Conservative party and another general election – all adding up to uncertainty continuing for longer.  

Recognising that the FTSE100 index reflects the global economy, rather than the domestic one (with three quarters of revenue arising beyond our shores), assets priced in sterling will receive a translational boost – with the UK equity market set to advance strongly and the £ value of an ounce of gold reaching record highs. By contrast with the worth of multinational stocks being marked higher, UK focused businesses are likely to recede into the shadows (albeit driven less by actual switching activity and more by consideration of the domestic economic outlook). Relative attraction of the home market will not be helped by yesterday’s news that European growth surprised on the upside and that Chinese trade data in May was also stronger than economists’ forecasts. The European Central Bank said that deflation had ended, signalling that its ‘easing bias had now ended’ while, in China, exports rose 8.7% to US$190bn compared to April 2017 (driven by strong consumption of iron ore for construction) and imports jumped 14.8% to $150.2bn. Global economic health appears set fair for the second half of the year but, unlike last year, the UK economy is more likely to be a laggard than a pacesetter.

The political landscape has rarely appeared so muddled, both south and north of Hadrian’s Wall, and in the short term heightened volatility in financial markets appear inevitable. Looking further out, the prospect of a more open debate on the critical issue of Brexit is likely to emerge (a ‘softer’, more business friendly result would seem to have increased, which should underpin sterling’s relative merit). Having said that, while the performance of mega cap plc within the UK equity market is primarily being driven by sterling, rather than top-line growth, investors in domestic stocks (especially consumer-sensitive businesses) should revisit the confidence they have in the fundamentals and valuations of each business post this election non-result.             

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.