Another political surprise…
Our Chief Executive, Richard Stone, offers his thoughts on the snap General Election called by Theresa May.
The Prime Minister, Theresa May, took politicians, voters and markets by surprise yesterday when she announced her intention to seek a snap General Election, a call which has been approved by MPs this afternoon with just 13 MPs opposing the move.
Already accused of political opportunism this looks like a good opportunity for Mrs May to seek a mandate from the British public with the opposition languishing in the opinion polls and a snap election meaning there is less time for the campaign to go wrong. The logic put forward by the Prime Minister centred on the need for a strengthened hand ahead of the forthcoming Brexit negotiations. With France going to the polls this weekend in the first round of voting for their new President and the German election to come in September a window exists for any political manoeuvring to take place in the UK while the EU gets itself aligned.
In reality the biggest challenge for Mrs May is her current wafer thin majority. Brexit negotiations will require compromise. We will likely have to pay something by way of a ‘divorce’ settlement, even if not at the levels of €60bn currently being talked about. We may have to compromise on aspects of trade and immigration. At each turn aspects of Mrs May’s own party may find those compromises unpalatable. Continuously looking over her shoulder to consider the parliamentary arithmetic will not be helpful. Not least those she is negotiating with would know that was a weakness they could exploit – exacerbated by the fact that the timetable for Brexit is due to come to a climax in 2019 just as attention would be turning to the 2020 General Election.
To decouple the British electoral cycle from the Brexit negotiation timetable and to strengthen the majority in parliament - reducing the scope for disruption any malcontents within the Conservative Party may cause through the negotiating process – therefore looks a sensible option to take. This is de-risked in part by being so far ahead in the polls at the moment.
Mrs May also currently faces the charge of not having a mandate – having become Prime Minister following David Cameron’s resignation. This has caused issues as she has sought to pursue policies and budgetary wiggle-room out of line with the previous Conservative manifesto. The u-turn on increasing national insurance rates for the self-employed being the latest and most tangible budgetary example.
At face value the markets appeared to react badly yesterday with the FTSE 100 falling by over 2%. In reality the markets saw the positives for the UK Economy and Sterling strengthened considerably – the fall in the FTSE 100 reflecting a stronger pound as much as market weakness. To the extent that there was market weakness this would be understandable as the market had to price in a risk – the risk of political instability if Theresa May has called it wrong and the election does not deliver her the increased strength she seeks – which previously had not been present.
The rise in Sterling is predicated on the outcome being a stronger UK government, unshackled from some of the budgetary constraints of the previous Conservative manifesto and able to deliver a stronger UK economy. This, of course, assumes that the opinion polls prove correct and Theresa May is shown to have made the right decision.
So what does this mean for personal investors?
In the short term it will potentially drive increased volatility. Political campaigns and elections can be unpredictable, as the last couple of years have demonstrated time and again. Newsflow and events can ultimately drive markets and any sense of uncertainty or doubt over the election outcome could heighten that volatility markedly. What happens for example if David Miliband announces he is re-entering British politics and the Labour vote becomes re-energised as a result? Beware the impact of sudden and sharp moves in the opinion polls for example. Who knows what surprises the next seven weeks will have in store?
If investors can ride through the short-term volatility, and assuming opinion polls are right, then a stronger government with the ability to play a longer negotiating game on Brexit without having to have an eye on an election in 2020, should be a positive outcome for the economy and for markets.
Investors in FTSE 100 companies, or tracker funds, in particular should be wary of the impact a strengthening of Sterling may have – either as a result of increased UK political strength and certainty or because of increased political uncertainty arising on the continent from the elections in France and Germany. An element of the rise in the FTSE 100 since last June has been the result of the fall in Sterling – as I have noted before. A significant strengthening of Sterling could be expected to at least in part reverse some of those currency driven gains.
Markets don’t like surprises or uncertainty. They’ve had plenty in recent times and Mrs May’s decision was certainly a surprise yesterday. Personal investors will be hoping that markets react positively to the outcome of that process in seven weeks’ time and that this will draw a line under the trilogy of recent political events which started with the 2015 General Election (in which Cameron won a surprise victory), was followed by the surprise vote for Brexit in June 2016 and will be brought to a close with the General Election on 8 June. Whether that yields a third surprise only time will tell.
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