By Nancy Curtin, Chief Investment Officer at Close Brothers Asset Management:
“The election outcome raises leadership uncertainty for the UK.
"Uncertainty around the UK’s negotiating strategy for Brexit has increased, as well as around the Conservative party leadership, which could delay Brexit negotiations. A second election in the autumn is a possibility, with a left-wing Labour government a more elevated risk. On the other hand, the threat of Scottish separatism appears to have diminished and likelihood of a ‘softer’ Brexit seems more likely.
“A coalition needs to be brokered before a government can be formed, with the Conservatives most likely to ally with the Northern Irish Democratic Unionists. Even in this most benign scenario, the Conservatives’ ability to push through bolder policies, especially on things like deficit reduction, is diminished and the DUP has made clear their preference for a ‘softer’ Brexit. Labour’s success may increase the likelihood of more public spending as Prime Minister May (or whoever is chosen to lead) decidedly missed the voice of voters looking for greater support in terms of social spending, particularly younger voters.
“While the reaction of Sterling has been relatively muted, we expect continued uncertainty to keep the pound under pressure. The UK is still running a significant current account deficit and uncertainty could also weigh on household spending and business investment. At this early stage, the balance of factors look less supportive for domestic UK equities. In contrast, large cap UK equities, with earnings overseas, should continue to benefit from the currency boost to earnings provided by a weaker pound. This is where most of our exposure lies.
“Going into the election, we have been positioned underweight UK equities, with a bias within our allocation to overseas-exposed corporates. We will be evaluating the situation as it evolves (the Prime Minister speaks today at 10am), and assessing the risk of a Labour government, should the prospect become more likely. Times of uncertainty can create interesting stock specific opportunities as pockets of value often emerge. As multi asset class investors, our portfolios have broad exposure to global companies, many of which can continue to benefit from improved global growth and earnings expectations that have little to do with UK politics.”