A Hung Parliament: The Impact on Portfolios

Yesterday’s election has resulted in a hung Parliament. This was not an expected outcome, so the coming days are likely to see further noise around how a new Government can be formed in the UK. Given the focus of the Conservative campaign on Theresa May personally, the Prime Minister’s future is likely to be among the questions debated within the Conservative party and the media.

Implications for Brexit are also uncertain, given the intended immediacy of negotiations, although the election result makes a softer approach more likely than previously considered. The longer term implications for the UK’s economic policy will develop through time, but the success of the Labour campaign will probably influence fiscal policy, regardless of which party is in Government. The course of the Bank of England’s monetary policy is unlikely to be altered.

Electoral surprises can have unpredictable impacts on financial markets and it is sometimes best not to jump to too many conclusions about the eventual market outcomes. President Trump's election victory last November is probably the clearest recent evidence of this, where after an initial weak knee-jerk reaction, markets generally took the result well. It may take a few days for the politics to settle down and for the markets to digest this.

Although capital markets are currently re-pricing for a bit more volatility, the reaction has been quite muted compared to the morning after the EU referendum. Sterling has fallen almost 2% to the bottom of this year’s trading range against the euro, while some of its strength in recent weeks against the US dollar has also faded.  In equity markets, the translation of international earnings of many of the FTSE 100’s constituents into a weaker pound looks set to provide support. For this reason, the FTSE 100 is outperforming the smaller companies of the FTSE 250, which has more of a bias towards domestic growth.

Internationally, there is no sign that markets are unduly ruffled, with European bourses largely unchanged. The response from bond markets is also quite subdued as the market considers implications for continued low interest rates, as well as the potential for future inflation.

Given these initial market moves, we expect the impact on Netwealth portfolios to be similarly muted. We may see some increased volatility in UK assets over the coming days and weeks as markets adjust to the changing political landscape. However, we remain comfortable that the balance of exposures to different asset classes, regions and currencies within portfolios will help to dampen this UK-specific event.

We will continue to monitor the situation closely, and consider the implications it has for portfolios. If you have any questions or would like to discuss your portfolio in more detail, please do let us know.

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