The expectation of a stonger pound is set to bring investor focus back towards sectors such as general and food retailers as well real estate as the election nears.
Prime Minister Theresa May announced a snap election last month, to be held on 8 June.
After a sharp sell-off ahead of May’s announcement, the pound surged to a five-month high of $1.2729 against the dollar from a low of $1.2513.
This is the opposite to what investors saw after the referendum last June where overseas firms became more attractive than domestic companies, given a significant drop in the pound.
AJ Bell investment director Russ Mould says key names in the general and food retail sectors such as Next, Dunelm and Mothercare could get a boost to their share prices if sterling remains at current levels or appreciates.
The real estate investment trusts and real estate investment services sectors could also benefit from a stronger currency, in addition to falling bond yields and cheaper valuations.
Mould says: “There is a risk that a sudden jump in sterling dampens overseas interest in British assets, but the UK still offers a rule of law and an independent central bank while a strong – or at least more stable – currency could reaffirm the long-term appeal of UK commercial property to potential buyers.”
Progeny Asset Management investment manager David Battersby argues the election will not change the fundamentals and stocks will remain cheap.
He says: “We do not recommend reducing exposure to the UK stockmarket. Some market analysts forecast the FTSE to break 7,800 and there are attractive opportunities in high-yield stocks with sustainable dividends.
“Sectors such as telecoms, oil, support services and pharmaceuticals all offer useful yields looking further ahead.”
But The Share Centre chief executive Richard Stone warns of “sharp and sudden” moves in opinion polls over the next six weeks and says investors should stay alert.
He says: “If investors can ride through the short-term volatility, and assuming opinion polls are right, then a stronger Government with the ability to play a longer negotiating game on Brexit without having to have an eye on an election in 2020 should be a positive outcome for the economy and for markets.”