Investors are currently in a state of uncertainty over tomorrow’s UK general election but could see stocks exposed to domestic earnings rally in the face of a clear Conservative victory.
Just over a quarter of financial advisers said election uncertainty is preventing clients from making decisions, Metlife research found.
But according to one investment strategist, a Conservative majority of over 60 could see FTSE 100 stocks exposed to domestic earnings rally as the pound strengthens. It may also mean short-term gilt yields would rise.
The reason would be an improved outlook for the economy and the prospect of Prime Minister Theresa May negotiating a ‘soft’ Brexit, said Tom Elliott, international investment strategist at deVere Group.
Mid- and small-cap indices would be more likely to rally compared to FTSE 100 stocks, which are more exposed to foreign earnings.
However, the chance of a Conservative majority of more than 60 is just 25%, Elliott said. There is a larger chance (55%) that May’s majority would be below 60, which would see sterling strength and benefit the FTSE 100.
Elliott added: “I estimate that there’s a 15% chance of no parliamentary majority [and] a Labour/Liberal Democrat pact could emerge to govern.”
A Labour majority under Jeremy Corbyn, meanwhile, has a 5% chance, in which case sterling, UK-focused stocks and gilt prices would all fall, Elliott said.
Andrew J. Belshaw, head of investment management at Western Asset Management, said: “There will be volatility around sterling as polls come out. A smaller Conservative majority or even hung parliament would likely lead to currency weakness due to an even more uncertain path for Brexit negotiations.”
In the medium to long term, Belshaw said Western favoured being overweight sterling and anticipated a real effective exchange rate for sterling of between $1.50 and $1.60.
Hartwig Kos, vice-CIO and co-head of multi-asset at SYZ Asset Management, noted that May’s lead in the polls was shrinking since the 100-point lead in April when the prime minister called the election.
“However, according to polls, the projected majority of 100 seats is fast shrinking. Given the tactical mistakes May made in the run up to the election, the chances are high she might only lead with a majority of 30-50.”
This would “meaningfully reduce her negotiation flexibility on Brexit”, said Kos.
The election has also caused concerns for advisers about their business, the Metlife research found.
Nearly one in three advisers (33%) said the general election was a major concern for their business over the next three months, compared with 27% who cited concerns about the UK’s departure from the EU.
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