Clearly the political way forward is difficult, but from a market perspective it’s an ambiguous result. What we do know is that markets hate uncertainty and there will be volatility.
So far the strongest reaction has been in Sterling, and this is likely to continue to be the case. There is an important translation effect for earnings given the international earnings base of much of the UK market, which will benefit from a weaker pound. Remember the UK stock market is much less reliant on the domestic economy than in previous cycles. A number of stocks that could be vulnerable under a more interventionist government have been weak for some time (eg transport and utilities), so this isn’t coming from a clear blue sky.
Gilts have managed to retain their ‘safe-haven’ status through a number of political events in recent years, but non-residents currently hold just under a third of the UK government bond market and any reduction in international investors’ appetite for UK assets would constitute a risk to gilt valuations. We don’t expect the Bank of England to respond directly to the result but it will be keeping a close eye on consumer confidence, particularly if the decline in the value of Sterling extends further from here.
Beyond that, it’s hard to draw firm conclusions regarding growth and spending at this point. While they have been reasonably resilient since the referendum, we’ve seen a definite softening more recently. UK consumer confidence appears to be running out of road and we are likely to see further weakening of the UK economy which will hit over-leveraged households.
And then we come to Brexit. The election result has reduced the likelihood of a hard Brexit, which is economically positive for the UK and Europe. A softer approach to Brexit could for example see potential structural support for Sterling down the line. It seems reasonable that any Brexit deal will now be subject to greater Parliamentary scrutiny and the government is more likely to seek to retain some elements of single market access.
Confidence in the UK now hinges on how quickly a new government can be formed. With diminished authority it will be difficult for the government to do very much at all and uncertainty is likely to dominate for as long as the position remains unclear.
With no outright winner in the election, it’s time for all players to sit down and attempt to achieve a coherent strategy. We need to wait and see what kind of cross-party approach might be viable.
Mark Burgess - Chief Investment Officer EMEA and Global Head of Equities - Columbia Threadneedle InvestmentsBLOG COMMENTS POWERED BY DISQUS