UK Election 2017 – risks and opportunities
Janus Henderson’s investment experts give ‘quick views’ on what the UK election result means for their asset classes and highlight any resulting risks and opportunities
UK Election: a Global Equity Income Perspective
Ben Lofthouse, Portfolio Manager on the Global Equity Income Team, believes the biggest short-term impact on business will be the effect of currency movements. He explains that sterling weakness will improve the competitiveness of UK exports, and the profits of overseas earners will be revised upwards, while on the negative side input cost increases will affect some industries.
The UK General Election outcome is less conclusive than the polls suggested. As expected the Conservatives will be the largest party, but they have fallen short of an overall majority and will likely need to work closely with the Northern Irish Democratic Unionist Party. In Scotland the significant reduction in the number of Scottish National Party representatives in Parliament may lower the likelihood of a second Scottish referendum. The result is not a rerun of Brexit, but does highlight the divisions within the country regarding the approach to it.
The biggest short-term impact on business will be the effect of currency movements. Sterling has weakened, which should improve the competitiveness of UK exports, and the profits of overseas earners are likely to be revised upwards. On the negative side input cost increases will affect some industries. The best opportunities for investors may come from international businesses listed in the UK and Europe that are sold off with the market, but where trading will not be impacted by the decision and which may benefit from currency weakness. A significant proportion of the team’s Global Equity Income strategies are invested in these types of companies. There may be short-term volatility in these share prices but we expect them to recover.
Domestic UK stocks are being sold off in the immediate aftermath of the result. Many of these have rallied significantly since Brexit last year, and some profit taking is expected. While there may be pressure on these areas (retail, housebuilding and financials) as the result is digested, in the long term the fundamentals are likely to reassert, such as housing shortages in some regions of the country or restructuring activities by management teams.
On the Global Equity Income team we did not take a speculative view on the outcome of the election, therefore, we did not need to take any action in the portfolios we manage as a result.
The longer-term implications of the result are very hard to judge. There does not seem to be a suggestion that voters are rejecting the idea of Brexit; it is more that voters see the decision on Europe as having being made and they therefore voted based on domestic policies they favoured. The outcome may push negotiations on Brexit further out, but some commentators say that it could help avoid a ‘hard Brexit’. Either way, it highlights the unpredictable nature of political events and reconfirms the importance of diversified portfolios and caution around making assumptions on binary outcomes.
UK Election: result signals Mayday on Brexit talks
Theresa May’s decision to call an early election to capitalise on the Conservative party’s polling lead in April has backfired. Instead of achieving the ‘stronger mandate’ to deliver Brexit she was seeking in this election and achieving ‘a period of stability’, she has plunged the country into a state of political confusion and has put her own role as prime minister in serious doubt.
Bad timing for Brexit negotiations
As the polls currently stand, the most likely short-term outcome is that the Conservative party will form a minority government, supported by the Northern Irish Unionist parties. However, the frailty of the government’s position means that a change in leadership of the Conservative Party seems highly probable and another election in the months ahead now looms as a serious prospect.
The fact that the formal phase of the Brexit negotiations are due to start on 19 June highlights the political significance of the election outcome. At this stage it is hard to see how the UK government, with no effective majority, will be able to put together a coherent set of policies to form the basis of a negotiation strategy. While it is possible that the UK government will request a delay to the start of the talks, the overall deadline remains a formidable challenge. Extending the March 2019 exit deadline would require unanimous support from all 27 European Union nations. It is far from obvious that they will have any appetite for this, given how resource-intensive the whole process will be and the fact that European Parliamentary elections are scheduled for May or June 2019.
A shift in stance?
On balance, the election outcome should probably be interpreted as representing a shift in the UK’s stance away from the sort of ‘hard Brexit’ that Theresa May was pursuing towards softer outcomes. However, the risk of a ‘no deal’ scenario is now probably greater, given the chaotic state of UK politics and the challenging Brexit timetable.
The general rise in uncertainty emanating from this inconclusive election outcome is clearly a negative for UK business and consumer confidence and ultimately growth. However, any effect here might be counterbalanced by the fact that the vote is likely to lead to an easier fiscal stance. We retain our core view that the UK economy is set for a low (1-2% gross domestic product) growth trajectory for a few years until uncertainty surrounding the Brexit process can be decisively dispelled.
Wary of UK exposure
Against this backdrop we remain wary of exposure to the UK economy and retain a cautious view on sterling. While the currency has already fallen a long way, it is likely to retain a negative bias until macro momentum has stabilised and political uncertainly has eased. Perceptions of the Brexit process will remain the key driver of sentiment on the currency. While the possibility of a ‘soft Brexit’ holds the promise of a more constructive view on sterling, the fog of domestic political uncertainly will need to clear before much faith can be placed in that scenario.