UK Snap Election: How Will It Affect Your Investments?

Investing

UK Snap Election: How Will It Affect Your Investments?

Investment expert Justin Kendrick – on behalf of Crossinvest – reveals what pitfalls you should avoid during the UK snap election.

Written by Xiou Ann Lim on 5 June 2017

Political uncertainty usually means a tumultuous time for markets. Just as Brexit and a Trump win were surprises that sent markets spiralling into volatility, the upcoming UK snap election might have a significant impact on the stock market as well as the pound sterling. Investment expert Justin Kendrick weighs in on behalf of Crossinvest.

How will the UK snap election results affect the stock market?

The FTSE 100  had essentially assumed it would be a solid Conservative victory until recent polls indicated a much closer race – even perhaps a hung parliament, which means there won’t be a party with clear majority seats in parliament. The equity market likes certainty and had already factored in Prime Minister (PM) Theresa May’s Brexit approach.

A close result or a hung parliament would therefore likely result in a fall in FTSE 100 led by domestic demand sectors. Within the FTSE 100, sector moves could be geared to how the GBP performs – given 70% of FTSE 100 earnings are derived offshore. A Labour victory could have various implications, given its far greater fiscal spending plans and a likely softer Brexit approach.

UK Snap Election: How Will It Affect Your Investments?

How will it affect the pound sterling?

In the immediate period following the snap election and shortly after, we expect volatility. Whilst there are many complex scenarios, our base case is that a solid Conservative majority would help GBP retest 1.30 resistance – whilst a weaker result would have the opposite effect.

While we note that the political effect could be short-lived, we are of the view that the longer term outlook would be bearish given the headwinds of UK’s large twin deficits, falling FDI, and uncertainty over how Brexit negotiations might pan out. We see GBP in a range of 1.20-1.30 barring any major developments like a much softer Brexit or a failure to reach a deal with the EU, for example.

We would caution against
adding to UK real estate assets

Will it change anything in regards to Brexit and how might that affect investments?

A solid Conservative majority would not change the likely outlook for Brexit negotiations, other than the fact that PM May would be in a stronger position to engage with EU – which might be positives for both equities and GBP. A weaker result would arguably provide hardline Conservative Brexiters greater ability to frustrate a softer deal and risk either no deal or a much worse deal.

This would clearly be bad for the UK’s economy, GBP, and equities. A hung parliament – or even a Labour victory – might be bad in the immediate aftermath for markets and for UK Gilts, but might also boost hopes of a softer Brexit. Our sense is Brexit uncertainty will likely deter FDI and portfolio investing whatever the result in the next two years, which may accelerate outflows and add to volatility.

The FTSE 100’s large weightings in mining, energy, and FMCG sectors – which should be relatively unaffected by the UK’s developments – means this may remain of interest to investors versus greater risk in GBP FI.

Is there anything else investors in Asia should look out for?

Our sense is the UK election will have only a limited impact on global markets, given its modest importance to the global economy and that any fall in GBP is unlikely to impact Asia. Our base case is GBP is likely to go lower – as it has done since WW1 – for structural reasons stemming from poor productivity, unsustainably high household debt levels, and twin deficits.

Thus, we would caution against adding to UK real estate assets. We suspect Brexit negotiations will prove to be rough at times and a deal might only emerge late in the two-year time frame, offering better opportunities to invest in GBP assets.

We also see a possibility of the Union breaking up in the next few years, with Scotland voting for independence and Northern Ireland becoming a potential leaver too – which could add to headwinds for the UK.

The bottom line

Despite early indicators of how the UK snap election may pan out, it may yet have something unexpected in store. To find out how you can ride out this uncertainty, get in touch with an investment advisor such as Crossinvest.

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