UK election: what a hung parliament means for UK equities and bonds
Following the surprise UK general election result, Schroders fund managers consider the implications for markets.
Equities view: Firms with international earnings may benefit from sterling weakness
David Docherty, UK Equities Fund Manager at Schroders, said:
“Even if the Conservatives are able to form a government, this result significantly reduces Theresa May's authority and her ability to negotiate Brexit."
Who might be the likely winners and losers on the FTSE?
“An initial flight to safety is likely in UK equities as investors favour resilient companies with international earnings.
“Economically-sensitive domestic consumer companies, such as general retailers, may be vulnerable to a weakening pound.
"This is because foreign exchange moves impact their profit margins and the real disposable income of their customers. Other domestic financial stocks such as banks, housing and real estate may also be weak.”
Brexit, taxation and renationalisation
“Longer term, a recovery in sterling is possible were the market to discern a reduced likelihood of Brexit actually taking place,” Docherty said.
“A stronger growth narrative might also emerge as the opposition parties argue for greater public spending.
“In the meantime, given Labour's greater proximity to power, investors will start to calibrate the impact on companies of the higher taxation and significantly greater government intervention (including nationalisation) inherent in the Labour manifesto.
“As much as these political events drive fierce debate, investors will also place them in the context of other factors. These include the general global economic backdrop, the valuation of UK equities and bottom-up stock selection considerations.”
Fixed income view: Inflation is expected to rise
Alix Stewart, Fixed Income Fund Manager and Stewart, said:
“One of the risks from today’s election result is that prices are likely to rise more than people had been previously expecting. This will likely be due to a combination of increased government spending and a weaker pound."
The outlook for bonds
“The outlook for UK government bonds is more uncertain,” Stewart said.
“However, they are likely to sell off at least initially as investors will require a higher return from them. This is because more government spending means more borrowing through bond markets and the higher inflationary environment.
“Longer term, however, UK government bonds should remain well supported due to the economic uncertainty caused by the political turmoil in the face of looming Brexit negotiations.”
Investment Director, Thematics
David Docherty joined Cazenove in 2000 and is a member of the pan-European equity team. David graduated from Durham University with a degree in History and gained an MBA from Cranfield School of Management. He is a Director of Cazenove Capital and has 24 years’ investment experience.
Fund Manager - Fixed Income
Alix Stewart is a Credit Portfolio Manager, based in London, and has been with Schroders since 2010. Prior to that, she worked at UBS Global AM as the Head of UK Fixed Interest and as a Fund Manager of Global Corporate Bonds. Her investment career commenced in 1994 as an Actuarial Trainee for Scottish Mutual.
This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.