UK Election: Investing after yet another voter revolt
Our multi-asset portfolios were already positioned for an extended period of uncertainty in the UK, says Anthony Gillham, co-investment director, multi asset
As the last ballots are counted and the television news anchors go off to collapse in darkened rooms, the snap election that was meant to be a cakewalk for the Conservative party, but descended into a dogfight, is finally over.
Ultimately the bet on a snap election by Theresa May, prime minister, failed spectacularly as voters rejected her quest for a ‘stronger mandate’ to carry out Britain’s departure from the European Union. Instead, the result was a hung parliament. May’s Conservatives have emerged as the largest party, yet without an overall majority after losing seats to Jeremy Corbyn’s Labour Party and the Liberal Democrats.
Sterling has already reacted to the unexpected turn of events, by declining versus major rivals in the immediate aftermath of an exit poll that suggested the Conservatives might not secure an overall majority.
Yet the currency has since displayed resilience, perhaps reflecting investor hopes for a softer-than-expected departure from the European Union, given the gains by Labour and the Lib Dems, and the perception that a second referendum on Scottish independence is now less likely, due to losses by the Scottish National Party.
Nonetheless, we expect further fluctuations in the currency as investors digest the implications for the economy of the evolving situation in Westminster, given May’s now tenuous position and the horse-trading that will need to take place in order to form a minority government.
Since the Brexit vote, the UK stock market has benefited from weakness in the pound – especially shares in companies whose revenues are in other currencies. This link may persist over the coming weeks and months, although it could come under pressure if the political uncertainty prompts investors simply to avoid holding UK assets.
UK government bonds, meanwhile, could gain in the near term on a flight to so-called ‘safe haven’ assets. Still, any strength could fade if it appears the next government does indeed seek a soft Brexit, prompting less support from the Bank of England for the bond market.
The longer-term outlook for UK assets is shrouded in uncertainty. Because we believed this would be the case regardless of the result, partly due to the surprising lack of detail on the major parties’ plans for EU exit talks, we positioned our portfolios accordingly ahead of the election.
In the run-up to the vote, the sharp contraction in gap in the polls suggested that instead of being a one-horse race, in which the only steed belonged to Theresa May, the election would in fact be genuinely competitive. This meant there could be outsized reactions by UK assets to the result, in our view, as the chances of a hung parliament – or even of a minority Labour government – rose from near-impossible to non-negligible.
We do not bet on binary events. As such, in most of our multi-asset portfolios we lowered our exposure to sterling – which we believed could bear the brunt of any adverse response by investors – to neutral versus our benchmark. Similarly, reflecting this cautious stance, we maintained a slight ‘underweight,’ or less-than-benchmark, position in UK company shares, and an even greater underweight in gilts, or UK government debt.
Now the result is known, we will reposition the portfolios as we seek to exploit the opportunities, and skirt the risks of the unfolding drama. As ever, we aim to produce consistent investment returns; downside defence, where possible; and genuine diversification.
In short, as yet another voter revolt in the UK gives observers a distinct sense of whiplash, we plan on displaying considerably more consistency across all of our multi-asset portfolios than the political narrative in Westminster.