Mrs May’s decision to call a snap election in the expectation of returning with a big Conservative majority failed in spectacular fashion. With no overall majority, the Tories now need the support of Northern Ireland’s DUP to command a majority in the House of Commons.
The weakness of Mrs May’s new government is probably the reason why the financial markets have been fairly calm. The sterling exchange rate fell by over 2% when the result was announced, and it has since recovered slightly, but the stock market has barely moved. It seems that investors expect that to get the DUP’s support, let alone that of Scottish Conservative MPs, it will have to alter its aim from a hard BREXIT to a softer one. This is the outcome that big business and the City really want.
Mrs May’s defenders point out that the Tories got a higher share of the vote than in 2015. So they did, but Jeremy Corbyn was nevertheless the real winner, since Labour’s vote share rose even more. That has consolidated his position as Labour’s leader and Labour’s position as a socialist party. It would be hard for the Tories to match Labour’s spending promises, and we suspect the Conservatives will want to avoid a re-run against Labour for as long as they can.
Ironically, right now we are seeing the signs of weakness in the UK economy that economists predicted before BREXIT: inflation is rising, consumer spending is slowing, and business confidence is falling, while most indicators show that Europe’s economy is accelerating.
A minority government can struggle on and survive, but the tensions around BREXIT (especially within the Conservative party) make that especially difficult. So yet another election looks likely within the next two or three years, perhaps sooner. But that uncertainty probably won’t bother the markets provided the BREXIT negotiations head in what they see as the right direction.
We do not take bold investment decisions based on politics. Even if you make the right prediction of the result, you can still be wrong about the effects, as the BREXIT vote and the US Presidential election last year showed. In both cases, the result was expected to lead to falling markets: but in fact share prices rose sharply in both cases. So investors who sold shares before either of those events were worse off.
In contrast, we base investment decisions on economic and financial data. We view large companies in the UK as overly reliant on a low level of sterling. Whilst this has been beneficial to these companies post-BREXIT, where we saw a sharp decline in sterling relative to other major currencies, we have a preference for mid-size and smaller companies in our client portfolios. We speak to a lot of fund managers who are finding great opportunities among the hundreds of UK listed companies that will thrive because of the quality of their products and services and the skills of their management – BREXIT or no BREXIT.
In general, though, a bigger percentage of our clients’ portfolios is invested in shares outside the UK, and with economic prospects for Japan, China, India and Europe now better than for the UK, we expect this to be an advantageous strategy over the next few years. We will not be adjusting portfolios based on the UK election result, but will remain focused on the global and regional economic and financial outlook.