Snap UK Election: Poll Fatigue or Battle Fatigues?

Steve Clayton - Fund Manager

24 April 2017

The answer to the above of course depends on whether you are a voter or a politician. Either way, the UK stock market had been trading sideways for a few months, until the Prime Minister’s decision to call an election stirred things up. Equities sold off on the news, and the pound increased in value.

The reason is simple; last year, the pound fell quite sharply on the referendum result, as markets priced in the expected impact of Brexit upon the UK economy. Conversely, equities rose because so much of the market’s earnings are made abroad, and those profits would be worth more in pounds.

If the challenges of navigating Brexit were not enough for investors, there are now new political risks to juggle too. Markets reacted to the news as if the chances of Brexit were a little reduced by this new twist to the politics.

In trying to think what the election might hold for the markets, I prefer to think what each voting scenario might lead to, in order to judge the range of possible risks and rewards. Here are a few possible outcomes:

1. Government Increases its Majority

   Clearly this is what Theresa May hopes for. A large majority would leave her better placed to resist special pleading at home and to rebuff any unreasonable demands from the EU. Brexit of some sort becomes more likely as a result. This could lead to renewed weakness in sterling and possibly gains for shares heavily exposed to overseas income.

2. Little Change to Parliament

   This outcome would be taken negatively. In calling the election, the Prime Minister has tacitly admitted she needs a bit more political muscle behind her to get the best outcome for the country. Failure to get it would leave her looking more exposed than before the poll was announced, heralding a raised level of uncertainty. Markets don’t like uncertainties, so trading could be volatile for a period until the new fault-lines and boundaries between the players are established.

3. Anti-Brexit Backlash

   A complete backfire for the Prime Minister sees anti-Brexit parties gain sufficient share in Parliament to destroy the Prime Minister’s majority, throwing confusion into every nook and cranny from Westminster to Brussels. Pushing Brexit through could be impossible for the (likely new) PM, depending on how far the territory has shifted. Markets would see years of uncertainty ahead. Stock market trading would likely be heavily influenced by the direction of sterling.

4. Rt. Honourable Jeremy Corbyn PM

   This would require quite a change in the polls, and is the outcome that right now, markets have not even attempted to contemplate, let alone price-in. Mr Corbyn’s famous ambivalence to the EU might make Brexit seem likely to proceed apace, but of course many of his MP’s are pro-EU. Throw in the likely raft of major domestic policy shifts that a new Labour government might seek and the potential for volatility is vast.

What does the election mean for the HL Select Shares funds?

In the short term, who knows? When markets get hot under the collar, just about anything can get caught up in the melee. But Charlie and I are not overly concerned, indeed Charlie is getting quite excited at the thought. Because when we choose shares for the funds we are quite explicit in trying to find businesses that we believe are relatively immune to the general goings on in the market and even the wider global economy.

Our favourite shares are in businesses that customers will come back to again and again. Take Domino’s Pizza, where we have been adding to our holdings recently on both funds. How many people will not order a pizza because their MP has changed colour? Or Reckitt Benckiser, which earns the vast majority of its income selling consumer health and household products to people outside these shores? No-one in Oz is going to hold off the Gaviscon because the UK Government’s majority has changed.

So in some ways, we’d be quite happy to see a sell-off, because it might bring one or two names that we’ve been admiring, but resisting on valuation grounds, down into buying territory. Even if it doesn’t, we’re happy that the resilience of the companies we have invested in so far should leave them little affected in practice, even if the market gets all het up for a while.

And if the market goes up as a result of the poll, well we’re running the funds with minimal cash balances, typically well under 1%, so our investors’ money will be hard at work right the way through. It is far too easy to fret over the short term, when what really matters is being invested for the long run. My recommendation is simple, don’t try to second guess the market, just make sure your money is invested in resilient businesses with great long term prospects. Then sit back and enjoy the game of trying to decide which politicians are talking the biggest load of Brexit Baloney as they jockey for our votes.

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View the HL Select UK Income Shares fund

View the HL Select UK Shares fund