Asset managers react to UK election results

The UK general election has yielded another unexpected election result, or rather no clear result, with a prospect of a hung parliament or a very small Tory majority.

With further financial market volatility on the horizon, asset managers have shared their view on Theresa May’s shock defeat.

David Zahn, head of European Fixed Income at Franklin Templeton Fixed Income Group, noted that May’s gamble didn’t pay off.

“She had hoped that a resounding election victory and an increased majority in the House of Commons would give her a mandate to pursue her own political agenda and, in particular, strengthen her hand in negotiations to secure the United Kingdom’s withdrawal from the European Union (EU).

“But those plans are in tatters and instead, slightly less than a year after the country voted to leave the EU, the United Kingdom has been plunged into further political uncertainty.

“We expect the pound to plummet and gilt yields to decline as investors embark on a so-called flight to safety. Overall, we think so-called risky assets, such as equities, are likely to underperform.”

SURPRISE RESULT

Richard Colwell, head of UK Equities at Columbia Threadneedle Investments, highlighted that the UK election result “is not what the market expected”, although he noted that the initial market reaction post the EU referendum and US election proved short-lived.

“A number of stocks that could be vulnerable under a more interventionist government have been weak for some time (eg transport and utilities), so this isn’t coming from a clear blue sky.

“Any sell-off in media and leisure stocks could prompt takeovers. However, if pressure on sterling continues and the currency returns to the lower end of its recent trading range, dollar earnings for multi-nationals listed in the UK will be boosted. Remember the UK stock market is much less reliant on the domestic economy than in previous cycles.”

NO MANDATE FOR HARD BREXIT

Robeco’s chief economist Léon Cornelissen noted that the narrative of May needing a landslide victory to create the maximum room for manoeuver to negotiate the Brexit “has dramatically failed”.

“During the campaign she was pushing for a hard Brexit, especially detailed plans on reigning in immigration, and a lot of nonsense that no deal with the EU would be better than a bad deal, and clearly there is no mandate for it.”

“But this doesn’t make the Brexit negotiations any easier. With a hung parliament it’s difficult to see how they’ll be able to make an upfront deal on the up to GBP 100 billion of divorce payments that are being demanded by the EU. What’s most likely now is a coalition between the Conservative and the Ulster Unionists, but it would be an unworkable razor-thin majority. So a collapse of the government is likely, with perhaps new elections in October.”

DEPRECIATED STERLING

Saker Nusseibeh, chief executive at Hermes said sterling is expected to come down as “markets abhor both the unexpected and uncertain”.

For Bill Street, head of investment for EMEA at State Street Global Advisors, sterling is already “substantially undervalued” against the dollar and euro, reflecting future uncertainties.

Pioneer Investments’ head of Global Asset Allocation Research, Monica Defend, noted that, since the referendum, the pound has experienced a sharp depreciation, but it has recovered some ground as markets started to discount the possibility of a “soft Brexit” and on the back of economic resilience in the UK.

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