looking at marginal seats the Conservatives were just 400 votes short of a majority, and Labour 103,550
Despite what some might want to tell us, it is fair to say in this election there were no winners.
The two biggest parties saw their share of votes increase significantly; the last time we saw this level of dominance was in the seventies.
Taking this a step further; looking at marginal seats the Conservatives were just 400 votes short of a majority, and Labour 103,550. In terms of turn out, this was the highest for 25 years and one of the highest for young voters. Of the 30% who didn’t vote, how would that have changed things?!
Interestingly May was more popular even losing her majority than Margaret Thatcher was winning a landslide in 1987, while Jeremy Corbyn won a higher share in defeat than Tony Blair secured in his final 2005 majority.
The Conservatives are set to do a deal with the DUP which unlike the formal coalition in 2010, will mean they support the Conservatives over certain legislation i.e. budgets, Queen’s speech etc. These arrangements are tricky, and any falling out puts the Conservatives into a lame duck situation as would losing 7 seats in any future by-elections.
So, what does this mean for investing in the UK and globally?
Politics in the UK
This election was about providing “stability” and legitimacy but in many ways, it exposed a deepening social divide.
It is not for me to debate this (although I would be happy to!) but it is worth considering that the Conservatives are being supported by a party that 99% of the population didn’t vote for! Equally a call by Labour to be the lead party to reflect the will of the people is frankly bizarre, when they said they wouldn’t do a deal with the SNP, and the Lib Dems indicated they would do no deals! As it stands Labour are the weaker of the two parties.
If this Government arrangement is to last then I think the word we need to get used to is compromise (well its better than stability!). We will talk about Brexit separately but much of what the Conservatives promised to do will simply not happen, and we may see a move towards spending rather than austerity.
But where does politics go from here? My personal view is that minority governments, or small majorities could be something that we must get used to. Many European governments operate in this way, therefore politicians need to put aside political ambition to broker deals.
There is much debate on whether there will be a second election, and personally I think we are more likely to see Theresa May replaced than go back to the polls. Labour are obviously keen to push for another election; firstly they believe it would sweep them into power, and second there are boundary changes due in 2019 which could change the political landscape once again.
It is worth adding that if during the period of government, the Conservatives lose just 7 seats even with the help of the DUP they will be a minority government. Interestingly, if Labour does form a government then the stock market tends to perform better than under the Conservatives and this is perhaps because they tend to spend more.
So, in summary I believe that political instability will be with us for many years to come. The parties need to put aside petty fighting, become less tribal and work for the interests of the country. That might be a shock for many, and it also means setting aside political ambitions! Perhaps a big ask.
The big picture
Monetary and fiscal fundamentals have not changed as a result of this election.
If we look at the Global Economy it is in pretty good shape. Europe has seen a massive outflow of money with fears of political instability but both the Dutch and French elections failed to deliver the “shock” results everyone seemed to be “expecting”. The next election is in Germany, and there doesn’t appear to be any concerns over the result. Italy’s election has been pushed back to 2018.
We are seeing valuations in Europe are about average but with growing earnings, improvement in the labour market and inflation coming through, it means there are many positives. Asia is another region with many opportunities, and as their main trading partners are Europe and other Asian economies (and not the US), perhaps we shouldn’t be too concerned by Trump trade sanctions.
In the US, there are some natural benefits to the economy with an uptick in house purchases and the move to self-sufficiency with oil and gas. Changes to tax could provide an additional boost.
But in the UK growth had started to slow and inflation was picking up and this has a double impact, firstly wage growth is falling behind inflation and secondly that naturally means weaker retail sales. Interestingly UK equities are cheap, with the fall in sterling so we are seeing more investment / take-overs from overseas companies. But there are concerns that the UK could fall into a recession if growth continues to slow.
In a global context, even before the election the UK didn’t look healthy. Interestingly, the election might be positive for the UK; a weaker sterling could be good in terms of exports and investment into the country from overseas, and the two extremes of the Conservatives and Labour have gone for the time being. If the Conservatives move away from austerity to spending then that could help the economy, and with a weak majority there will be lighter regulation which is good news as well.
In summary, global markets fared better before the election and we still believe that to be the case especially in Europe and Asia. The UK was slowing, and perhaps heading towards a recession. The current situation might actually be positive for the UK in terms of a potential end to austerity and less regulation.
Brexit
We have two years to get an agreement. During this time we are going to hear a lot of noise in the media but the reality is that we won’t really know what is happening. It is massively complex, and always was. The election was supposed to be a mandate for a “hard Brexit” but many people have no idea what this entails. We also suspect that of those who voted leave, some may not be so comfortable with the idea of leaving as the reality sinks in. We are just starting to see this with a weaker sterling and growing inflation; this means we have less money overall and you get less to spend when you buy your holiday money (people understand that!).
In a game of chess, the aim is to “out fox” your opponent and what you hope is that they make it easy for you to do this! As it stands the UK enters the fray with a much weaker hand. The challenge for Theresa May is how does she approach the negotiations, will she ease back from a “hard Brexit” to reflect how people voted, or is she beholden to the hard liners in her party without a majority to fight them. Another concept being mooted is cross party co-operation, of which I have always been in favour. Effectively you remove it from the political debate.
If we opt for a “soft Brexit” it is likely to get more support across the political divide and therefore even if MPs within the Conservative party vote against any deal, it will be supported by other parties. A “soft Brexit” might be better for the markets as well.
In summary, there is growing consensus that the UK may have to take a different approach to Brexit, certainly the elections in the Netherlands and in particular France have invigorated the EU and it will not be an easy ride for the UK. Even if we decided to come back in, it is likely to be on worse terms.
FTSE and Sterling
On 22 June Sterling vs Euro was 1.30, at its lowest point it was 1.10 and now it is around 1.13. On 23 June, Sterling vs Dollar was 1.49, at its low it was 1.20 and now it is around 1.27. It is worth adding that Sterling vs the Dollar has been falling since June 2014 when it peaked at 1.71, and July 2015 against the Euro when it peaked at 1.44. With the Euro, the last time we saw these levels was 2011.
At its lowest the FTSE 100 was 6,138 on 20 June, and now is hovering around 7,500 (+18%). The FTSE 250 was 17,045 on 22 June and is now 19,994 (+15%), much of that recovery has come at the start of 2017 as sterling stabilised.
The most likely fallout from political instability and Brexit is sterling, some economists believe we have hit a natural bottom but expect there to be greater volatility and wouldn’t be surprised if it goes lower the further we go into Brexit negotiations. In terms of the FTSE 100 we don’t think this is overvalued; it was near 7,000 in 1999, with inflation it should be 11,000 plus. 70% of FTSE 100 companies receive revenues from overseas so a weak sterling is good for them. However, with the FTSE 250 this drops to 42% and we believe more domestic focused companies could suffer in this environment. We saw after the Election, companies like Lloyds’ shares dropped 5% and although they initially recovered they have started to drift downwards again.
In summary, speaking to economists many expect the FTSE to be around 7,500 by the end of the year. When we compare this to its low point of June 2016 this will be a remarkable return. However, it is likely that sterling will remain the weaker element and even though “soft Brexit” may be seen favourably by the markets, (which could see sterling rise) we wouldn’t expect a return to previous high levels for a few years to come.
Interest Rates
There was already some talk that there would be no rise in rates until 2019. Economic data is weak, and the Bank of England will not be keen to do anything that makes things worse for consumers. If we drop into a recession there are no options left with rates unless we go down to zero. The general view is that the 2019 date may be pushed out further.
In summary, there are no expectations that rates will rise and with high inflation it means any cash savings are being eroded in real terms and this situation is unlikely to change any time soon.
Conclusion
Firstly, don’t believe opinion polls!!!
The UK was already slowing prior to the election, and the big question is whether we can avoid a recession. But the UK is in isolation to the rest of the world with Asia, Europe and the US all looking positive with perhaps the US the weaker of the three.
Brexit and politics will dominate the UK landscape for many years to come and we shouldn’t be surprised if we continue to run with minority or small majority governments. In terms of whether Labour take power we are aware that the City is preparing for that possibility, but we don’t think there is an appetite for another election (yet!).
It is worth concluding with a point we have made many times before, and that is if investments are globally diversified then what happens in the UK shouldn’t have a big impact on the rest of the world’s markets, and actually a weaker sterling has the potential to turbo charge returns.
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.