As Theresa May wakes up after her post-election nightmare – a hung parliament rather than the increased majority the Conservative Party expected – I think it is safe to say that her decision to call an early election has backfired. It raises a number of questions, not least over the future of Mrs May herself but also significant doubts about the Brexit negotiations, which are due to start imminently.
From an investment point of view, investors may have preferred a comfortable Conservative majority due to the belief that the UK, with a stronger parliament, would have a more robust negotiating position on Brexit. However, there are some that believe a hung parliament may lead to a softer outcome during the Brexit talks especially with the Conservatives now set to establish some form of coalition government with the Democratic Unionist Party (DUP). Negotiations with the European Union could now be made much more complicated by this result.
So far this morning, markets have reacted fairly calmly, with Sterling recovering slightly after being down as much as 2.5 per cent against the dollar and the FTSE 100 actually in positive territory. This is as a result of the impact of the weaker currency on companies with large overseas earnings.
However, stocks that have a domestic focus have faltered slightly, with the FTSE 250 down marginally. Gilt yields have risen modestly, partly based on predictions of a softer Brexit but also due to higher inflation expectations.
Having spoken with a number of investment managers this morning, their views are generally positive given that client monies have been invested across a broad range of asset classes. In addition, with the backdrop of solid global growth, there seems to be little panic across the city. As always, we continue to monitor developments very closely and diversification by both asset class and geography remains central to any portfolio constructed for our clients.
Strategies between investment managers vary, however, sizeable exposure to overseas earners on the FTSE 100, meaningful positions in gold and being well positioned for other important global themes such as the continuing growth of the US and Eurozone economies has allowed managers to remain neutral and calm following the election news.
As Sterling has fallen modestly on the back of the result, this is bad news for holidaymakers going abroad this summer. However, on the plus side, mortgage holders may be relieved that due to the increased uncertainty there is the likelihood that the Bank of England will keep interest rates low for now.
Finally, with all the focus in the media on investment performance it is easy to miss the importance of “inflation possibly being higher than expected”. For many of our clients, especially those who have substantial future costs, the impact of higher inflation means that their award will have to counterbalance these increases. I believe that this once again illustrates the importance of considering Periodical Payments for damages awards. Many clients enjoy the peace of mind of knowing that if costs increase, then their Periodical Payment could also increase in line with the relevant indices to which it is linked.
The fact remains that whoever resides in 10 Downing Street will undoubtedly have a number of challenges, including how to negotiate Brexit against the backdrop of a hung parliament, the economy beginning to weaken amid the ongoing uncertainty and the squeeze on real incomes.
If you have any questions with regards to these changes please feel free to contact Neil Jefferies Dip PFS MCSI (Chartered) Head of Financial Planning Services