07/06/17Will Election 17 be Heaven 17?
All election roads lead to……..
Well it’s that time again where we’ve either postal voted, or we’ll trot down to our polling station..or will we? will we ‘spoil’ our ballot paper and vote for a ‘no vote’? or will we vote for who we’ve normally voted for, because that’s just what we do..Although if we expect do what we always do, but expect a different outcome-well that’s just plain bonkers!
It’s fair to say though, that the party who gets in, will steer us through unknown territory, so it’s a pretty big vote-but I’m no politician and as I hate it when politicians, journalists etc try and give financial ‘guidance’ (which is nearly always advice in my opinion!) so I will stop talking politics..but…will whoever gets in, alter the markets? will Sterling shift up or down because of who wins? that Sterling swingshift will have an almighty effect on the FTSE 100, due to the large amount of companies listed there, that shows is values in US Dollars-weaker sterling could lead to higher profits being declared..but has this all been priced in?
Initially, polls suggested that the Conservatives could hold a majority of around 100 seats after the election. Such a scenario would provide the Prime Minister with a strong mandate to drive for a softer Brexit. However, recent polls have since shown the Conservative’s majority falling amid Labour gains. Some polls are now forecasting a real risk of a hung parliament, although others continue to predict a fairly strong victory for the Conservatives
The difference between poll results is largely a function of the methodology by which they are constructed. Polls predicting a larger turn out of young voters (such as that run by YouGov) are constructed using voters’ intentions, but turnout among younger voters has
historically been lower than pre-election voting intentions surveys suggest. As younger voters generally have a greater propensity to vote for Labour, polls calculated in this way tend to show an increased chance of Labour winning. Conversely, polls that estimate
voter turnout based on historical data (such as that run by ICM) are still predicting a fairly large margin of victory for the Conservative Party. Given how unreliable political polls have proved over the last 12 months, we cannot rule out any result, but it appears that voter
turnout among the younger demographic will be the primary swing factor in determining the result
How have markets reacted?
As with many political events, the foreign exchange markets have borne the brunt of volatility surrounding election expectations. Sterling initially rallied strongly after the Prime Minister announced the government’s intention to hold a general election. The domestically-focused FTSE 250 Index also outperformed the multinational-heavy FTSE 100 Index for two reasons. First, the sterling value of the FTSE 100 Index’s multinational constituents suffered an adverse currency-translational impact that domestic-focused companies avoided; Second, expectations that a larger Conservative majority would mean a smoother Brexit process were judged to have a greater positive impact on domestically-focused firms.
Nevertheless, changing expectations surrounding the size of the new Conservative majority have since caused sterling to come under some pressure; it is now trading back at the same level against the euro that it was in mid-March ( noted the euro has also strengthened over this period as European political risk has declined). Domestically-focused UK equities have also underperformed their international counterparts in recent weeks amid increased UK political risk and Brexit uncertainty.Sterling is likely to continue to be the first order casualty in the event that political risk rises. Likewise, the currency’s strength will continue to have a second-order effect on the relative performance of domestically-focused and internationally-exposed UK companies.
The result: what to expect?
Experts say that medium to long-term view remains that sterling is undervalued relative to the other major currencies. However, this view is based on the current political status quo; should the Labour Party win an outright victory, or a ‘progressive alliance’ of Labour and the SNP become possible under a hung parliament, then the UK economic outlook could change markedly, warranting a re-assessment of sterling and other UK assets.
It is believed sterling and UK equity markets are currently pricing in a 50-60 seat majority win for the Conservatives. In the event of this result, there would be expected to see a small rally in sterling and UK equities as the risk of a hung parliament disappears. If the Conservatives are able to win meaningfully more seats than this, it would be expected that sterling would rally as investors price in a smoother Brexit negotiation process. It would also follow that the FTSE 250 Index to outperform the FTSE 100 Index under this scenario amid a general improvement in UK investor sentiment.
On the other hand, we would expect a strong negative reaction for sterling if the Conservatives do not win a majority. We would also expect linked relative outperformance of the FTSE 100 Index over the FTSE 250 Index, albeit amid sharp declines for domestically exposed UK companies in general. If the Conservatives win with a lower majority than expected, then sterling and UK equities could still come under pressure as Theresa May’s authority is undermined, investors begin to anticipate more difficulty in the forthcoming
Brexit negotiations and, potentially, as the possibility of a Conservative leadership challenge emerges.With the European political backdrop improved, contagion may be limited across the world’s other regions. However, in the case of a very market-unfriendly outcome we cant rule out an adverse impact on broader global investor sentiment, particularly in the short term.
Now, whilst I cribbed some above from various wealth management companies (Brooks Macdonald being the larger provider of information), the important thing is what do we do? and to that, I say we do we’ve always done: remain diverse, spread across different assets, different investment focuses and different geographic regions. Markets have priced in an anticipated result, so clearly, if there is a major swing as previously mentioned, then some thought will be needed as to what we do, but I’m not into making swathing changes in the immediate aftermath-we stood firm after the decision to Exit the EU was announced and I suggest the same discipline is applied, come Friday morning.
I will say, is that we have the opportunity to vote-whoever you vote for, or whether you intend to spoil your paper-go to the ballot box-but don’t do nothing-if that makes sense?
Oh..Heaven 17? ‘Temptation’ was the title of one of their singles…have a watch of the video!
See you soon,