Last week, we saw the Conservative Party falling eight seats short of achieving a majority in the House of Commons. Brexit negotiations with Brussels are due to begin next week but with the result ending in a hung parliament, EU officials do not yet know if the policy outlook will match that mapped out by Mrs May before the snap election.
The market is continuing to digest the election results and the pound is facing some near-term downside risks. Sterling fell to its lowest level for nearly two months on results day and sank further to a seven-month low against the euro on Monday, signalling that investors are worried about the economic ramifications and political uncertainty that will weaken our position ahead of Brexit negotiations. In contrast, the UK equity market has been quite resilient – not least because the large, international companies that dominate the FTSE100 derive a large proportion (c75%) of their earnings from abroad, and a weak currency means that these overseas earnings will be markedly higher when reported in Sterling. The domestic macroeconomics of the UK has little to do with the collection of international businesses that make up the majority of the UK stock market.
For long term investors, the outcome of the election will matter little in the context of returns from a well-constructed equity portfolio that is diversified by company, sector and country. In particular, the aim of such a portfolio is not to outperform the market in any one short period, but to deliver attractive long term real returns. It is also important to remember that investing is also about taking advantage of uncertainty – and the greater the uncertainty, the more likely that irrational price movements will present attractive opportunities for long-term investors.
________________________________________________