Investment Committee: Implications from Theresa May’s snap election

Chairman: Beth Brearley, editor, Fund Strategy 

After nine months in power and around six public declarations refuting plans for a snap election, on 18 April Prime Minister Theresa May made a shock U-turn, announcing there will be a general election in June.

With less than a month to go until voters hit the polls, how are the election candidates faring? Will the result enable the elected Prime Minister to broker a better Brexit deal for the UK? And how are the markets reacting?

May is clearly confident of a conservative win and has called the election to put the kibosh on internal dissent among her party and give her some wallop in Brexit discussions with the EU. While the Tories’ lead fluctuates among the various polls, at the time of writing, they had a 19-point lead over labour (according to ICM).

However a conservative win may not be a shoo-in. On the day the election was called 150,364 people registered to vote, the highest number to register on a single day since the EU referendum campaign last year. Of these people, the majority (57,987) were under 25 – a demographic that tends to favour labour.

Historically, straightforward election campaigns have been positive for the stock market. In the six weeks preceding the last seven elections, the FTSE 100 rose on the three occasions the result was widely predicted, research by Schroders shows. Conversely, when candidates have been neck-and-neck pre-election, markets fell.

In the immediate aftermath of the election announcement, sterling reached a six-month high while the globally focused FTSE 100 had its biggest fall since the referendum.

Will the pattern from previous elections continue in the coming weeks? And could voters prove the polls wrong with a shock result, in what is paradoxically becoming the new norm?

John Husselbee
Head of multi-asset
Liontrust Asset Management

The knee-jerk reaction to the snap UK election announced by Theresa May was a stronger pound and a weaker UK stock market. The suggestion there was that Brexit may be softer than current expectations. Once again however, we are wandering into speculation territory and run the risk of exposing ourselves to the dangers of listening to short-term noise rather than seeking a long-term signal.

Nothing as yet has materially altered the trend in economic growth nor inflation and we won’t be rushing to change direction in our portfolios. If anything, with the polls suggesting the Conservatives will retain a majority, perhaps we should expect a smoother ride in the Brexit negotiations. Of course, those negotiations are now on hold or at least moving at a slower pace until the outcome of the General Election on 8th June. As such we will all have to wait a little longer to find out how much the nation has to fork out to access trade and exit the EU. And unless a few more equally minded political parties gain power across the continent, that figure could be a lot higher than we all expect.

Tim Cockerill

Investment director
Rowan Dartington

The consensus is that the Tory party will have a bigger majority, which seems a reasonable assumption. However the Brexit deal that is finally negotiated will be no clearer, and there will be a lot of twists and turns and backtracking I’m sure before it happens.

The impact on sterling is important for investment returns and for inflation, and it looks like the first effects of a weaker currency are now hitting consumer spending and the economy. This I would expect to accelerate so domestic stocks are likely to remain weak.

I would expect a lot of potential investment into industry and business to be put on hold while the talks happen, or at the very least until clarity begins to emerge as to what deal the UK will actually have.

While Brexit is a big deal for the UK there are plenty of other issues to consider globally, some of which are going to be far more important in determining investment returns than the terms of Brexit. Or perhaps the polls will surprise again and a large Tory majority never happens.

Peter Lowman
Investment Quorum

The calling of the General Election created an instant reaction in both the UK equity and foreign exchange markets. Firstly, sterling rallied against a basket of currencies, hitting a five-month high, while the FTSE 100 suffered from concerns that companies within the index with a high exposure to overseas corporate earnings would begin to suffer.

Conversely, the mid and small caps have reacted more positively, given their higher exposure to domestic earnings and the benefits from cheaper import costs.

Understandably, given the change of political circumstances, there seems to have been some rotational trades in certain stocks and sectors which could continue over the next couple of months, leading up to the election. However, similarly to the EU referendum back in June it might be best for investors to do very little in respect to portfolios, especially if they include good quality businesses on a long-term time horizon. Indeed we might even have a further buying opportunity if we experience some volatile days, or a worthy pull-back in the markets, on election or geo-political jitters.

/u/v/y/James_Calder_200.jpgJames Calder

Head of research
City Asset Management

Recent history tells us that the efficacy of polling predictions for elections/referenda has diminished. Nevertheless, the June UK General Election, barring any exogenous shock, will be a case of not if, but by how Theresa May’s Conservatives will win.

As investors, we have more than a passing interest in the result. We have not and do not envisage altering our stance on asset allocation due to the election. We would go as far as to say the outcome of the French election will have a greater impact upon markets (particularly European) than the UK’s. In fact, Macron’s strong result in the first round of the French Presidential election had an immediate positive reaction within European markets and for the euro itself.

The forthcoming German election will have a lesser impact given that both of the frontrunners are very pro-Europe.

We maintain our positive outlook for developed market equities and believe it is likely there may be a modest uplift for the UK on the back of a Conservative victory; but our portfolios are not predicated on this.

Jon Cunliffe
Charles Stanley

Most pollsters and pundits anticipate a Conservative victory in the forthcoming election. The governing party is seeking a stronger mandate to see through the Brexit negotiations, and the relatively new Prime Minister wants endorsement of her general policies for the next five years.

Assuming the Conservatives do win with a working majority, there will be no great changes of policy. Markets know what they have been getting since 2015, and there will be more continuity than change after the result.

The Government has already said it wants an industrial strategy, wants to promote growth and more employment all around the country and is committed to more infrastructure spending. It remains too early to know how the future relationship with the EU will work out, as formal talks have not yet begun between the two sides.

It remains in both sides’ interests ultimately to reach agreement on future trade, citizens’ rights and other important matters.

The least unlikely alternative to the Conservatives would be a left of centre coalition committed to more spending, higher taxes and more borrowing than the Conservatives.

Independent View: Chris White
Manager of the Premier Monthly Income fund 

General elections tend to pose investors two problems. The first is the uncertainty created in the run-up to an election, causing consumers and businesses to hold off from making big ticket purch-ases and investment plans. As a result, sectors such as housebuilding often underperform prior to an election as their sales rates slow. However, the Conservatives look virtually assured to win with a big majority.

The second issue is the impact of the winning party’s policies on the economy, industries and individual companies. All eyes will therefore be on the Conservative manifesto when it is released. One area almost certain to be impacted is the energy sector, with the Conservatives expected to cap prices for customers on default tariffs. This is unwelcome news for Britain’s energy companies.

On Brexit, Theresa May is unlikely to lay out too much detail to give herself as much flexibility in the negotiations as possible, but the more Conservative MPs she has by her side, the stronger her hand.

Since the election was called, sterling has already moved higher on anticipation a large Conservative majority could lead to a ‘softer’ Brexit. Sterling is likely to move again on the result

Ultimately, while it’s important to be aware of any potential policy changes on industries exposed to regulation, we believe investors should avoid any rash changes to their portfolio. Global confidence is currently high and quality companies tend to remain quality companies.