The stock market liked Theresa May so far – hitting a string of record highs – but what will come next for shares?
Say what you want about Theresa May, despite a disastrous election campaign markets have seemingly bought into her as a ‘strong and stable’ leader for Britain.
Since she took over leadership of the Conservative Party and became Prime Minister in July last year, the FTSE 100 has climbed steadily, repeatedly hitting record highs and wavering above the 7,500 figure.
And despite its outcome, her decision to call a snap election to strengthen her hand in the Brexit negotiations sparked a rally in the pound to six-month high against the dollar to $1.29 in the announcement’s immediate aftermath.
The UK market has reacted well to Theresa May’s initiatives in the past but will this continue in the fallout of the general election?
Even as the results of last week’s election came in and markets wobbled on the news of a hung parliament, the FTSE 100 went on to rack up big gains on Friday afternoon after it became clear that May had clung onto leadership by the skin of her teeth.
With just 318 seats, the Tories were backed into a corner and have hashed out some form of co-operation with the Northern Irish Democratic Unionist Party, which brings 10 seats and a majority of just three in the House of Commons.
The result was unexpected, and means that it is now difficult predict the what the Government’s approach to Brexit will be.
What does this mean for markets?
Markets like certainty and although May has established a minority Government and maintains her intention to ‘get on with the business of running the country’ there is very little certainty about how long she can hang onto power.
This may not matter for investors however. While May in power since the referendum has meant more political certainty up until now, much of underlying reason that stock values have consistently risen over this time has been down to some 70 per cent of FTSE 100 company revenues coming from overseas – particularly from the United States.
This means that its performance is as much linked to the value of the pound relative to the dollar and / or euro as it is to who is in charge in Westminster.
FTSE 100 firms display a resilience to Brexit, elections and other domestic political movements because although these companies trade shares on the London Stock Exchange, their operations stretch beyond the British Isles.
This has been reflected in their performance since last June’s referendum result: the FTSE 100 fell as much as 5.6 per cent to 5,982.20 at market close 27 June from close on the day of the referendum but has since rallied and continues to flirt with yet another record high.
Similarly, the index of the UK’s biggest companies seems to have shrugged off the commotion following recent general election result. By 8.30am last Friday, the FTSE 100 was up 83.5 points, or 1.1 per cent, at 7,553.5. It gave back some gains, but closed 77.4 points up or 1.04 per cent over the day.
A better indicator of the damage caused by the political uncertainty generated last week is the FTSE 250, which is widely considered as a barometer of the health of the UK economy.
On Friday, the index initially slipped but then rose to trade up 0.13 per cent, or 26.55 points, at 19,770.
Investment advisers are unsure this will last however.
Around 70 per cent of FTSE 100 company revenues come from overseas – particularly the US
Adrian Lowcock investment director at multi-manager investment firm Architas, said: ‘The outlook for the UK looks incredibly uncertain and foreign investors are unlikely to want to take the risk with the UK when there are plenty of alternative choices.
‘In particular, domestically focused companies are more likely to suffer as they don’t benefit for the currency weakness and a minority government increases the risks to the UK.’
Darius McDermott, managing director of fund ratings firm FundCalibre, said while the market looks to see if a minority Government can actually work and if May keeps her job, there is likely to be a bit of volatility.
This could be driven by currency fluctuations more than anything. The most extreme reaction from the election result was in the currency market where the pound initially fell against the dollar before rallying slightly.
In numerical terms, the pound suffered a significant dip from 1.296 at 8.45pm when the prospect of a hung parliament begin to filter through to a low of 1.266 at 6.30am the following morning when the election result was set in stone. The pound was hovering around the 1.27 mark at opening on Monday (12 June 2017).
Neil Wilson, senior market analyst at finance broker ETX Capital, said robust consumer spending and the relative political certainty of May’s premiership had underpinned the performance of the pound this year.
‘In many sense consumer and business confidence have been far more resilient than most expected and this was undoubtedly influenced by relative domestic political certainty offered by Mrs May’s Government,’ he said.
‘Neither look to be particularly solid now, with Mrs May’s leadership hobbled. The election has plunged the UK into another political mess and this is likely to weigh on business confidence in the near-term.’
More volatility is on the cards
Indeed a snap survey by the Institute of Directors today revealed business confidence has fallen ‘through the floor’ in the wake of Friday’s election result.
Wilson said: ‘Britain’s economy has held up pretty well since last June but there are signs of it being undone.
‘The IOD has warned that business confidence has collapsed but it’s perhaps a little early to see how this plays out over the coming months and the impact on sterling. There is a strong chance that it will weigh until a clearer picture emerges from the political scene.’
May has today confirmed her new cabinet, heralding among other things, the return of Brexit heavyweight Michael Gove.
Despite this, the new cabinet also has a large contingent of Conservatives who voted to for the UK to remain in the EU which, according to some political commentators, suggests that a softer approach to the Brexit negotiations could be forthcoming.
There is sure to be heightened volatility as the fallout from last week’s election plays out but investors have been warned to avoid a knee-jerk reaction and concentrate on their long-term goals.
What should you do to protect your investments?
Investors’ portfolios should not be skewed to the UK market regardless of the election result. The popular FTSE All-Word Index allocates a mere 6 per cent of its holdings to the UK market, so unless you are bullish, there is a strong argument for international diversification.
Lowcock said: ‘Most British investors are UK-based so they tend to have more in the UK, a home bias. This is generally fine, but that exposure is probably much higher than people should have.
‘I would suggest between 40 per cent and 60 per cent of your equity exposure should be in the UK as there are always attractive opportunities around the world and diversification overseas would have helped over the past year as the pound fell, boosting the value of overseas equities. The reverse is also true though you do expose yourself to risks if other currencies fall against the pound.’
McDermott favours absolute return strategies – funds which are designed to deliver a positive return regardless of market conditions – in uncertain times.
He name-checks Henderson UK Absolute Return and Smith and Williamson Enterprise as well as Church House Tenax Absolute Return Strategies and Premier Defensive Growth for the more the more cautious investors.
Lowcock also advocates such strategies for the same reason and recommends Newton Real Return and the Standard Life Global Absolute Return Strategies funds.
Ben Yearsley, director at Shore Financial Planning, meanwhile holds a different view.
‘For those looking about a bit nervously there are many options, though I would steer clear of abolsute return funds as most haven’t proven themselves,’ he said.
‘I’d be looking at funds like Artemis Strategic Assets and Personal Assets Investment Trust for those who want to invest but don’t want a full-on exposure to the UK.
‘Having said that, simply having a well diversified portfolio of quality funds in different markets and regions managed in different styles is also a good way of getting long-term exposure. The global economy is ticking over nicely, you want equity exposure in this environment.’