At the time of writing this post, exit polls indicate a close UK election result, once final votes are counted. It’s still possible that the ruling Conservative Party will be confirmed as the election winner. But, at this stage, the most likely outcome is that it will only be able to form a minority government or rely on the support of minor parties to stay in power.
Regardless, this is a disastrous outcome for the Conservatives, which several months ago looked to have an unassailable lead over the opposition Labour Party in opinion polls. There is already speculation that Conservative leader, Theresa May, will be forced to resign in the wake of the result.
The UK result was largely unexpected by financial markets, which beforehand had factored in a comfortable Conservative win. The biggest immediate market casualty was the pound, which dipped around 1.5% when exit polls were released. It subsequently recovered somewhat, but was still significantly lower than before the poll results were known. Asian share markets and share futures for northern hemisphere markets were largely unaffected by developments.
We consider that there are unlikely to be major ramifications for global markets from the UK vote. The UK is a relatively small part of global markets and the developments are specific to the UK. Within the UK, it’s unclear at this stage what the ultimate effect of the vote will be on the country. On the one hand, there may be a period of uncertainty as the Conservative Party seeks to negotiate support from minor parties, or there is consideration of holding another election. Alternatively, the close election result may mean a higher likelihood that a less hard-line stance will be taken with negotiations over the UK’s exit from the European Union. This could be relatively more favourable for the UK economy and perhaps provide support for UK investments and the pound.
Our portfolios contain a number of UK shares. In the short-term, the fall in the pound will reduce their value in New Zealand dollar terms. This effect will be negated to a certain extent by currency positions we hold to offset impacts from movements in the pound. Looking further out, there may be parallels with the reaction to the Brexit vote last year. In the months after the result, the large decline in the pound boosted UK exports and company earnings, which benefited the shares of UK based companies. It’s possible a similar scenario may unfold after today’s vote. Many of our UK holdings are in large multinational companies. At the margin, they tend to perform well when the pound falls. Ultimately though, the UK companies we invest in are more dependent on the fortunes of the global economy.
Photo source: Chris Lawton
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.
John Carran, Senior Economist at Gareth Morgan Investments
You can read more articles by John on the GMI blog.