The shock results in the general election brings even greater uncertainty to the economic picture. Investors must now grapple with heightened sterling volatility and the spectre of even more fraught Brexit negotiations.
The absence of a ‘strong and stable’ government presents a complex investing landscape, with more plot twists to unravel over the coming days and weeks. It also ultimately presents opportunities for long-term investors who should focus on business models which have the ability to deliver sustainable returns to shareholders, regardless of the ongoing political turmoil.
The fall in sterling will be a further boost to exporters, especially companies in the FTSE 100, but there are plenty of small and mid-cap companies which will also benefit.
For example, Victrex, a leading polymer specialist based in Lancashire, has all its manufacturing facilities in the UK, whilst over 95 per cent of its earnings come from overseas markets. Horizon Discovery, the Cambridge-based life sciences specialist, has developed into a world class leader in the field of gene editing and earns over 60 per cent of its earnings outside the UK.
Domestically-focused companies will come under pressure, but there are plenty of well-positioned corporates who have a history of delivering consistent performance in volatile times.
For example, Close Brothers has an enviable track record of delivering growth through the last financial crisis and remains one of the better capitalised financial services companies in the UK. Meanwhile, Mears, the Gloucester based support services company, with its exposure to recurring non-discretionary social housing maintenance, has delivered 20 consecutive years of dividend growth.
Investors should be more concerned over the potential delay in Brexit negotiations which are due to begin on 19 June. These may even be put on the back burner until a credible government has been formed. Hung parliaments and coalition governments are not the ‘strong and stable’ foundations to enter into a series of complex negotiations with the EU.
The ability and willingness of corporates to press ahead with capital expenditure plans will be hampered by this uncertainty and this, in turn, could have meaningful drag on future investment returns. Although the safe money will be on defensive, export-led sectors, there are plenty of opportunities in the mid and small cap arena for long-term investors prepared to ride out the near-to-medium-term volatility.
Ketan Patel is a fund manager at EdenTree Investment Management