What does the UK election mean for your investments?
British Prime Minister, Theresa May, has announced a snap general election for 8 June to ‘make a success of Brexit’. This led to a sharp fall in the FTSE 100 and a rally in sterling. For investors, what could be the longer term impact on your investment portfolio?
On 18 April, Theresa May called an unexpected press conference outside Number 10 Downing Street to announce a snap general election on 8 June. If the polls are to be believed, the Conservatives may be able to significantly increase their fragile parliamentary majority of 17 to one that is closer to 100. If this occurs, it is our view that the UK’s negotiating hand with the European Union (EU) will be significantly strengthened, after the promise earlier in the year to give Parliament a vote on whether to accept the final terms of Brexit.
With a large Conservative majority guaranteed to support the result of the negotiations, there is every chance that the negotiating team will be able to strike a more measured approach with the EU, without having to pander to those MPs that sit politically on the fringes of the party.
In the markets, the currency exchanges reacted immediately, with sterling gaining 2.2% on the day the snap election was announced against the US dollar, 1.7% against the Japanese yen, and 1.4% against the euro. For investors with exposure to these currencies, this resulted in an immediate loss of value. In a weak day for global equity markets (sabre-rattling from North Korea causing concerns in Asia, and the uncertain French election concerning European markets) the FTSE 100 fell by 2.5%, which was the biggest loss since the European referendum resulted in a Brexit vote. However, the losses, while significant, were not totally unexpected given that the FTSE 100 typically has a negative correlation with sterling as 70% of company earnings come from outside the UK.
From an investment perspective how should you be positioned?
Ultimately the election is still to be run, and the polls could be wrong again. But this brings to attention the foreign currency exposure risk for portfolios. Moreover, gains that UK investors made over the past three years from sterling weakness could easily evaporate in a period of sterling strength.
IG Smart Portfolios are currently well positioned for a rebound in sterling, through buying currency hedged exchange traded funds (ETFs), with GBP asset exposure ranging from 100% in our Conservative portfolio down to 63% in the Aggressive portfolio. To put this into context, the iShares Core MSCI World ETF (SWDA), a global equity tracker, has just a 6.5% exposure to UK equities.
The currency hedging within our portfolios is designed to lower day-to-day volatility and provides a good degree of protection against increases in the value of sterling. This will serve our clients well if markets gain confidence in Theresa May’s plan for Britain. To give an idea of how this approach helps smooth returns, yesterday our portfolios ranged from flat in the Conservative profile, down 0.6% in Balanced, and a loss of 1.4% in our Aggressive portfolio. This compares favourably to a decline of 1.9% for the MSCI World GBP Index.