Market update - June

UK political uncertainty creates sterling weakness

The loss of a Conservative majority leaves the UK with greater political uncertainty and a more challenging background to Brexit negotiations, which are due to start on the 19th June. While some will argue a coalition government may lead to a 'softer' Brexit, the weakened negotiation stance and time pressure could potentially cause a 'harder' Brexit or no deal. This uncertainty poses downside risks to sterling and to UK growth. Given the Conservative losses, we think policy might move to be more populist and pro-growth which, along with sterling weakness, could increase inflationary pressures.

Domestic assets face challenging outlook

Large cap UK equities are net beneficiaries of a weaker sterling as most of their earnings come from overseas. Domestically biased smaller and mid-sized companies are likely to suffer from the more challenging UK environment. UK government bonds are negatively impacted by rising inflation expectations and we are unenthusiastic about their prospects.

Portfolio implications 

Despite the worsening outlook for the UK, the global recovery in activity remains intact and upgrades to European growth are offsetting the slightly weakening outlook for US and Emerging Markets. We are retaining our exposure to equities to benefit from the global growth environment, which should translate into corporate earnings. We still favour exposure to overseas equities given the uncertainty surrounding the UK; by investing in unhedged overseas equities directly and through tilting towards large cap equities in our domestic portfolios. The election result overnight underlines this view. Bonds remain unattractive and we value diversification into alternative assets such as infrastructure or absolute return funds where appropriate. 

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