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What the general election shock means for stocks

Fund managers believe Tories' failure to win a majority could lead to another election and a second EU referendum, weighing on some areas of the stock market.

 
What the general election shock means for stocks
 

Leading fund managers have warned that the shock general election result leaves a huge cloud over the UK’s equity, bond and currency markets.

They argue that UK assets will be haunted by the spectre of a second general election, potentially held within a year, alongside a second referendum on the UK’s exit from the European Union (EU).

Simon Brazier, manager of the Investec UK Alpha fund, said a second EU referendum could not be discounted. In his opinion, the lack of mandate for the Conservatives increases the chance of a ‘softer Brexit’, which would mean staying in the single market. 

'This will provide some comfort to many and may steady both the currency, bond and equity markets. Negotiating Brexit on a two-year time line was always going to be an uphill task. This election result now makes it even more likely that Brexit negotiations will take longer. The longer it takes, the higher the chance of a second referendum. This should not be discounted,’ he said.

He suggested a second referendum could take place at the end of the period of negotiations if parts of a coalition government were unhappy with the deal that was on the table and would prefer to put it to the electorate.

Prospects for pound 

Investors are divided over the impact this uncertainty over the Brexit negotiations could have on the pound. Sterling has fallen today in response to the shock election result, and Monica Defend, head of global asset allocation at Pioneer Investments, said the currency was likely to remain under pressure.

‘With a weak government and political uncertainty emerging from this election, the path towards a smooth Brexit is less clear,’ she said.

The probability for a hard Brexit is now smaller, but the UK’s negotiation stance has likely been weakened and medium-term growth prospects for the UK could be dampened by the increased uncertainty, with negative implications for sterling.’

But others argued the likely move towards a ‘softer’ Brexit would prove positive for the pound.

It will soon become apparent that expectations for Brexit have become softer, suggesting that the pound can resume its upward progress,’ said Chris Derbyshire, chief investment officer at Seven Investment Management.

The large remain minority proved itself to be a significant voting bloc. Negotiations with the European Union (EU) may have to be delayed, increasing the necessity for a transition deal that should cushion the impact of Brexit on the economy. While this result makes negotiations with the EU more complicated and difficult in the short term, it almost certainly makes the outcome softer.

Schroders’ economist Azad Zangana said that even if Theresa May maintained her push for a ‘harder’ Brexit, the election result would leave her on the back foot with EU negotiators.

I think what will happen is that we will be offered a "take it or leave it" deal - and I don't think the government will have much power to negotiate away from that deal,’ he added.

This is because of the difficulties the government now faces in terms of achieving political consensus.

‘Europe can now ignore what Theresa May wants and pitch something that is a lot softer, knowing that the rest of parliament is more likely to support it,’ he said.

Alix Stewart, a fixed income specialist at Schroders, added there was an irony that Theresa May initially set out her intention to help those ‘just about managing’ and has today been left ‘just about managing to stay in power’.

Back to the polls?

The Conservatives’ failure to gain a majority in the general election creates the potential for another general election, which could be held within a year.

Jim Leaviss, head of retail fixed interest at M&G, believed a Conservative-DUP coalition would find it difficult to govern. He said there was every prospect Labour could use its momentum from yesterday's strong performance to win an autumn election and implement its agenda of nationalisation and increased public spending.

'It was a fantastic Labour result,' he said, pointing out it was the party's biggest increase in the vote since Clement Attlee's post-Second World War landslide in 1945.

It had been achieved by a huge turnout by younger voters, 72% of whom had voted Labour, Leaviss said. 'They all turned up and voted predominantly for [Jeremy] Corbyn.'

David Docherty, a UK equity fund manager at Schroders, suggested the prospect of another election resulting in a Labour majority or a Labour minority government was likely to ‘gnaw away’ at investor sentiment towards UK assets.

This could be particularly detrimental for the gilt market, as a significant number of overseas investors hold UK government bonds.

'Largely the investors who fund borrowing in the UK tend to be overseas. If there is any question of fear for the direction that the UK is going with Brexit – with maybe a Labour government or more political uncertainty or upheaval - we might find that investors prefer to invest in other bonds. We could see the gilt market underperforming and borrowing costs rising in the UK, certainly relative to other countries,’ explained Stewart.

If political uncertainty causes overseas investors to shun UK equities and bonds, this could cause the so-called risk premium (the reward you receive for taking on risk) associated with UK assets to increase.

 
Rising gilt yields could also result in mortgage rates rising, as mortgage rates are priced off gilt yields and real interest rates.

If it started to look likely that Labour was able to form a minority government, or primed to take power in the next poll, Docherty said this would raise the possibility of so-called ‘reflation trade’ emerging in the UK. As Labour’s manifesto included higher government spending, this could ultimately result in inflation. 

What it means for stocks

In spite of the uncertainty, Docherty believes that the sell-off in domestically-focused UK stocks may present investors with selective opportunities.

Although the pressures facing consumer-facing stocks cannot be underestimated, particularly at a time of rising inflation, Docherty suggested the retail sector could offer some value.

'I am currently thinking about some of the stocks in the retail sector as examples. I would probably have a preference for companies that have some kind of internal story, perhaps the way the company is managed or their scope to improve returns,’ he said.

Brazier suggested backing companies that were not reliant on the strength of the UK economy and instead have ‘self-help’ characteristics which mean they can reinvest cash back into the business.

Alternatively he pointed to  recovery stocks, such as Rolls Royce (RR) or Balfour Beatty (BALF), where new management teams were implementing turnarounds.

He suggested steering clear of any companies that could be affected by a changing political backdrop, such as Royal Mail (RMG), house builders, gambling companies and utilities.

'If there is a second election, that provides political risk into those business models,’ Brazier added.

But others were more optimistic about prospects for house builders, which were among the worst hit stocks as markets digested the shock election result.

Richard Buxton, head of UK equities at Old Mutual Global Investors, said the voters’ rejection of austerity policies could support the sector.

‘The most significant impediment to the sector’s continued progress had appeared to be a discontinuation of the Help to Buy scheme, of which there was no mention in the Conservative manifesto,’ he said. ‘As we enter an era of increasing anti-austerity, the scheme’s survival prospects may now improve.’

David Jane, fund manager at Miton, agreed. ‘We have a small holding in the house builders, where recent slower mortgage approvals and the election have caused prices to weaken short term, and the currently low mortgage mortgage rates and wider availability of high loan-to-value offers mean the background for volume remains favourable.’

Richard Colwell, head of UK equities at Threadneedle, was meanwhile sanguine about the broader picture for UK stocks, arguing the initial market reaction could prove short-lived, as it did with the Brexit vote and Donald Trump’s victory in the US presidential election.

‘The UK market has been out of favour with international markets for some time. Asset allocation to UK equities is already as low as it was in 2008 at the height of the banking crisis, so there is no sense of hot money leaving the market,’ he said.

‘So lots of uncertainties and the domestic political and economic path forward is murky. However for UK equities the outlook is more measured and we will be looking for selective buying

20 comments so far. Why not have your say?

Roger Neville

Jun 09, 2017 at 16:34

Both the Conservatives and Labour wish to negotiate a good deal for the UK in the Brexit negotiations. In the light of the election results is there now perhaps a case for the negotiating team to comprise both Conservative and Labour members so that the EU side see that they are negotiating not with a party lacking clout but the greater part of the whole political establishment?

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anglo29

Jun 09, 2017 at 19:11

If it were the older style moderate Labour party I'd agree. Unfortunately the current extreme left nature of the Labour leadership creates a chasm that would be practically impossible to bridge with the Conservatives.

Rather like the SNP, negotiating a "good deal for the UK" would always come second to doing down the Tories........In 2017 Britain, historical parochial party hatreds override worldly political considerations.

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SDRL

Jun 10, 2017 at 01:56

The Pound depreciating will benefit UK stocks:

http://news.sky.com/story/uk-manufacturing-boosted-by-surge-in-demand-for-british-goods-10904697

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Hugh M

Jun 10, 2017 at 05:32

I have never liked the EC or the people who run it. Since the Brexit vote, I have come to despise them. However, if there were another referendum on membership, I would again vote to Remain as I believe that it would be in the best interest of my country. There is a big caveat to remaining now though. Would we be forced to join the disaster known as the Euro?

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James Oliver

Jun 10, 2017 at 07:56

For some of us I think the whole political system appears to focus on each party grinding down the other. What the country needs is the best heads in Both parties to work towards a sensible outcome to Brexit. Each talks about either austerity or spending - we have come through a period of over borrowing not just by previous Governments but by consumers - neither party can demonstrate what the outcomes might look like for either policy. Large numbers are used to win votes but nobody has a clue what difference an additional 20bn will make if spent on say NHS - we assume salaries like the Police Force - throwing extra people at a business to solve problems is an unproven strategy. The country needs a strong determined leader who will make unpopular decisions - there is not such a person on the horizon yet.

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Baffled

Jun 10, 2017 at 09:34

I'm baffled.

Why should anyone think there would be a Remain option in a another EU referendum?

The UK has left the EU under the auspices of Article 50 and any referendum would have to be on an application to join under the auspices of Article 49.

Article 49 requires the joining state to adopt the Euro as its currency. There are no exceptions to this.

The UK would have no right to a rebate. This was lost after triggering Article 50.

The EU would have make a fresh assessment of the suitablility of the UK as a member and this could take years.

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Dennis .

Jun 10, 2017 at 09:43

People forget that the Labour party is a long way from obtaining a workable majority . It has lost the last three elections yet this is hailed as a success. In reality the current situation will cement Corbyn and his left wing followers' belief that they are winning. They are not and without a Blair type move to the centre they will never return to power.

As for investment advice, put your money in global companies until the brexit deal is finally sorted.

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Garth Nicholson

Jun 10, 2017 at 09:45

ISTR that the EU stated that they would be happy for the UK to cancel the Art 50 declaration anytime during negotiations. Once we have left, however re joining would be a very different deal - almost certainly joining the Euro. As for special rebates - forget it.

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anglo29

Jun 10, 2017 at 10:57

Re. suggestions we could still "Remain"......No way. Not only would pressure be put on to adopt the Euro.....and look what that has done to Greece, Italy, Portugal etc. .....How many EU countries are kept solvent by "quantitative easing"??.....much of that paid for by us. And what of the allegedly corrupt core of the EU gravy-train, where for years the accounts were reportedly never audited, millions allegedly going missing, later to resurface in private bank accounts. When exposed some time ago, the "whistle-blower" was given her marching orders.

EU membership?.......no thanks

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SDRL

Jun 10, 2017 at 14:30

The UK is better off without the EU. For one thing the UK wants to control their borders while the EU wants open borders, an untenable situation. Further, the UK wants local laws and not legislation done in Brussels. It would be better if both groups accept their difference and make the most of it.

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Hugh M

Jun 10, 2017 at 14:43

As I understand it, article 50 can be cancelled if approved by all members. Therefore, no need for an application to join.

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Tomboy

Jun 10, 2017 at 19:46

Mrs May has been used as a stalking horse by Osborne & Co this was deliberate & intended with the aim of making Osborne P M if this ha

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Tomboy

Jun 10, 2017 at 19:48

Happens we will be back in the U E & be completely shafted

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Andrew Stevenson

Jun 12, 2017 at 12:14

Ending the election on 318 seats, Theresa May needed just eight more MPs to secure a Parliamentary majority.

In the eight constituencies with the tightest margin over the Tories, the combined majority was 786.

This means that, had the Conservatives convinced 401 people across these eight constituencies, Theresa May would still have her majority in Parliament.

---------------------------------------------------------------------------

Just got to find those 401 people and lock them in their garden sheds.......

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Grumpy Geoff

Jun 12, 2017 at 22:45

No one is talking about the real problem with EU Human Rights Laws.

Free movement of labour also means free movement terrorists and criminals.

Read this Wikipedia entry to see how our attempt to solve Islamic extremism was sunk by EU and the enemy within - leading Human Rights lawyers, the likes of Corbyn and his pet Shami Chabrabati. The recent deaths in Manchester and London are a direct result of HR laws. I am looking forward to the trial of Phil Shiner now disgraced and disbarred. Off course it will take 2 years and a £1million to make sure he gets a "fair" trial.

I never understand why when you behave like an "animal" you get HR.

We were sold the abolition of hanging in 1965 on the basis that we might hang the wrong person. Ian Brady the most evil beneficiary has just died after 52 years detention at a cost of £m's when he asked to die anyway.

I believe that the British public is sick of the virtual breakdown of law and order in this country with 3,000 people a year suing the police every year for assault and 30,000 assaults on the police every year never even mentioned in the press. The current Isis attacks will surely lead to copycat attacks on Muslims now you only have to hire a van and we will have more appeals for calm and integration. We have had the army on the streets briefly but I would be happy to see them backing up the police permanently as I have never been on a demo as they always turns into a riot. It will get worse and will probably never get better and I am sad that my children and grandchildren will never live in a peaceful, safe GB.

https://en.wikipedia.org/wiki/Prevention_of_Terrorism_Act_2005

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SDRL

Jun 13, 2017 at 01:03

Grumpy,

Totally agree.

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anglo29

Jun 13, 2017 at 20:12

Well said Grumpy Geoff.

One thing I've never understood, why do we let people from this country who've gone to Syria to fight for Islamic State, back into this country to freely roam the streets?.....These people have committed treason by doing so. Why are they not arrested upon their return and charged with the same? Successive governments have stated that "We are at war with terrorism"....Well when you are at war you do not let your enemy go free to possibly commit future atrocities.

Flowers and candles are not going to stop future terror attacks. Yet that's all we see on our TV screens in the wake of recent murderous incidents. Where's the anger??.....or do the BBC filter out any such comments made?

Moderate Norway is taking steps to ban the wearing of the burka in public for security reasons. What is our government doing?.....Seemingly yet more meetings of the Cobra Committee....and what do these meetings decide?......"Something must be done"?.......er yes.

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SDRL

Jun 13, 2017 at 21:13

anglo,

I could not agree more with you.

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kenneth douglas

Jun 13, 2017 at 21:32

I despair, reading the views of my fellow countrymen. All I keep hearing, is the single market and the economy. The reason the EU masters, 'Germany', have tied the single market to accepting Freedom of Movement, No Borders, is be course this is the second step; on the way to every EU nation having no borders, no controls of people, no national identity, just one large nation, Europe. The United States of Europe, under the directive of Germany. A Leopard never changes its spots, and Germany never have.

I don't, for the life of me understand any Brit, knowing the sacrifice this country paid in two world wars, why we should now, be begging on hand and knees, whimpering; to find a loop hole, to remain in this sleazy, corrupt EU dictatorship.

I have never had any desire to be subject to the dictatorship from Germany, via their unelected bureaucratic poodles. I fear this is just the start, soft un-intrusive control, slipping laws across to nations, that are to lazy to even read them, being passed and agreed blind. Signing Treaties, that neither the parliaments MP's, and certainly not their people, have a clue about, never having been consulted. We voted in the 70s, to be members of the European Free Trade agreement. We never voted for membership of a political Union! I don't see anyone taking our political parties / leaders to court, for ignoring the will of the people, or such leaders signing Treaties without the consent or in most cases the knowledge of its people.

I am fearful, of what lies ahead, not for me, but for my grand children, and their children. I read to day, of the wild threats, from Brussels, laid against Poland, Hungary and the Czech Republic, if they don't take more immigrants, including, calling on their people to rise up and over throw their governments This is what the EU Army is all about, it is not to fight Russia, it is to eliminate dissidents, under the guise of helping the law enforcement.

If we are so hell bent on being in the Single Market, under their existing laws, we will continue to pay Billions to Brussels, probably far more than we have been paying up to now. We will be dictated too, on the amount of immigrants we will have to take in, year on year. We will have to join the Euro and their new Army, We will be the financier for every new project, while being treated like sh**t,

I am happy to trade with equal tariffs, co-operate with EU nations, are all things of benefit to us, the UK, no more, no less. If we agree to the single market on their terms, we will have archived nowt, we will be in a worse situation than we are now..

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anglo29

Jun 14, 2017 at 10:14

Kenneth Douglas:

Your concern over Germany still wanting to dominate Europe could be more relevant than you think. I've been reading some very disturbing accounts of how, having failed with WW2, powerful elements within Germany now seek a "Greater Germania" by industrial domination through the EU.

To give one example; the powerful German chemical conglomerate I.G. Farben, has allegedly been hovering up other similar companies within the expanded EU. Perhaps the name I.G. Farben rings a bell?....It should do, it's reportedly the same company responsible for "Zyklon B" poison, used to eliminated thousands in the WW2 Nazi gas chambers.

Apparently there is so much concern over the "dark side" of the EU within Europe, that a publication; "Nazi Roots of the Brussels EU" has appeared. Much of it can be found online. There is enough here, even if only partly true, to make me want nothing to do with the EU as it now stands.

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