Philip Smeaton, Chief Investment Officer at Sanlam comments on what markets care about following the General Election result:
A question mark now looms over the shape of the upcoming Brexit negotiations.
Markets were hoping for a timely and decisive deal with the EU, but that scenario now seems less likely.
Much will depend on the government that Theresa May eventually forms, and there will doubtless be concessions.
Over the coming weeks markets will be particularly nervous as we enter a period of uncertainty.
Earlier this week, foreign exchange markets discounted the possibility of a hung parliament or Labour victory. As a result, sterling has yet again borne the brunt and fell nearly 2% when the exit poll was revealed. How quickly the currency recovers will depend on the outcome of the hung parliament, but we can expect it to remain the barometer of investor sentiment, and therefore volatile, in the short-term.
Markets will be particularly nervous about taxation policy. The Tory pledge of lowering corporation tax to 17% by 2020 would have given the UK one of the lowest rates anywhere in the G7. While we expect this rate still to be met, the Tories may have to concede on some of their austerity pledges, which will make cutting taxes more difficult. Whatever the repercussions of a hung parliament, markets want to see lower corporate taxes as they support company earnings and investment.
Our view is that inflation remains on an upward trajectory, fuelled in part by high import costs and energy prices. Today’s result does not change this and the weakness we have seen in sterling will put a small amount of incremental pressure on prices.
Bonds and Equities
Equity markets may be nervous in light of the result, but we do not foresee any dramatic dislocations, especially amongst domestic players. Large multinationals are affected by movements in sterling and could move a little more, reflecting swings in the pound and global sentiment rather than domestic political issues. We don’t think that bond yields will move much from their current levels, unless significant concessions are made to Tory pledges, something that is looking unlikely at this stage.