UK Elections - Sterling posts relief rally
After all the talk about a knife edge result and the endless war-gaming of various coalition or minority scenarios, the poll that really mattered – the election itself – has confounded pundits and embarrassed the pollsters by delivering a relatively decisive outcome for the Conservatives. In the process it has seen some big ticket political figures exit the stage in a night of high drama.
In terms of the market reaction, sterling rallied almost immediately on the news of the exit poll, signalling knee-jerk approval of a more conclusive outcome than expected and continuity in the approach to reducing the deficit.
There has also been a positive initial reaction from the UK stock market which had hitherto appeared to largely discount the impact of the elections, despite the almost apocalyptic warnings of many leading business figures of the threat to the economy. A much feared pre-election ‘uncertainty’ sell-off never arrived. Markets tend to overreact to ‘events’ and our view is that long-term investors should largely ignore such ‘white noise’ and focus on fundamental factors.
UK markets don’t reflect the UK domestic economy
It's important to remember that the UK equity market isn't particularly reflective of the UK domestic economy. The London Stock Exchange is global in nature, with estimates suggesting that more than 70% of the earnings of FTSE 100 companies are generated outside the UK. Factors such as the pace of global growth, oil prices and policy decisions by the US Federal Reserve are arguably more relevant to some of these international businesses than who resides in Downing Street.
That's not to say the elections and who governs the UK are irrelevant. Certain businesses were clearly more sensitive to potential policies mooted during the campaign, including household energy suppliers, property companies, tobacco firms and banks, as well as more domestically focused business, such as small enterprises that use zero-hour contracts, so some investor anxiety about specific companies might now abate.
A return to business as usual for now
Moreover, a perception of a relatively clear result should provide the boost of a backdrop where individuals and companies can put political uncertainty further down their list of concerns - at least until a future EU membership referendum slated for 2017 - and return to ‘business as usual’ for now. Undoubtedly, some firms and individuals will have held back on investment or spending decisions until the elections were over.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.