June 13, 2017

Pegler’s market report – 13.06.17: UK election June 2017 ‘May-hem’

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (13.06.17) Business section under the title Pegler’s Market Report:

UK election June 2017: May-hem

In another shock to pollsters’ credibility, the Conservative party have failed to secure an outright majority. However, assuming the 10 Democratic Unionist Party MPs side with the Conservatives, and Sinn Fein do not take up their seats, the Tories should be able to form a government. Questions of whether Theresa May can stay as UK Prime Minister are necessarily circulating. Simply put, her political gamble in April has not paid off. May-hem indeed.

Raymond James’ Chris Bailey comments: “From a financial-markets perspective all of the above smacks of uncertainty for the UK’s domestic and external policies. The biggest reaction inevitably came from the value of the British Pound, which at the time of writing has fallen considerably following the election result.

All of this has implications for UK equity and fixed income markets. A weak Pound helps the foreign currency earning sectors (such as the mining, energy, pharmaceutical and industrial sectors) and the immediate reaction by the UK stock market will be to favour such names over their more domestic centred peers in the retail, banking and building/construction sectors. Overall, these ups and downs will mean the UK equity is less impacted than many think at face value, but the performance mix between different shares is going to rise significantly.

Uncertainties and a lack of forward clarity are rarely good news for investors, especially as clear scope for another election before the end of the year is apparent. It is certainly true that the financial markets backdrop that UK investors have seen over the last seven of eight years, of strong gains and limited volatility, is going to change. Returns are probably going to be lower and uncertainties higher – and that’s even before the considerations of curve balls like minority governments or any aggression by European governments.”

Many businesses were doing their best to ignore the noise of politics – up until today. The electorate’s split decision generates further uncertainty for business communities, who are already grappling with currency fluctuations, rising costs, and the potential impacts of Brexit. This result will prove much harder for UK businesses to ignore. The swift formation of a functioning government is essential to business confidence and wider economic prospects. Businesses have demonstrated they are adept at forming alliances and coalitions when important interests are at stake. They now expect the same of the UK politicians.

Positively, however, all is not lost. The likelihood now is that the practical Brexit timescale will be pushed out. Further, if in some form a coalition government can be formed, these current political uncertainties will fade a little. Additionally, the immediate differences in performance between international-facing and domestic-centric shares will create opportunities for stock pickers. If you put all of this together, there are opportunities for flexible and knowledgeable investors.

By David Pegler, Brighton Capital Management