Hung parliament: How the City’s biggest investors are responding to election results

'With hindsight, the decision of Prime Minister May to hold a snap election backfired spectacularly,' says the CEO of Hermes Investment Management

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The Independent Online

The pound fell sharply after the UK election resulted in a hung parliament, plunging the future of the country and Brexit into deep uncertainty.

Here’s a roundup of reaction from big investors and economists as well as their forecasts for the pound and UK stocks over the coming months.

Saker Nusseibeh, chief executive of Hermes Investment Management

“With hindsight, the decision of Prime Minister Theresa May to hold a snap election backfired spectacularly. A populist surge, similar to what we saw in the UK referendum or the US and French elections, saw voters respond to John McDonnell’s economic policies, and to Jeremy Corbyn’s authenticity. This combined with growing doubt about Prime Minister May’s leadership, particularly since she was starting to be blamed for not doing enough to deter the terrorist atrocities in Manchester and London, delivered one of the most unexpected results in UK Parliamentary elections in decades. Markets abhor both the unexpected and uncertain.

“The expected reaction is for both sterling to come down and possibly the FTSE, notwithstanding sterling’s fall. We are likely to also see forward markets discounting rises in interest rates which will adversely impact the consumer in the short term as mortgage rates could start to rise further and faster than most borrowers budgeted for.”

Azad Zangana, senior European economist, Schroders

“For the economy, households and corporates will be concerned by the increased political uncertainty. However, at the same time, the paralysis in Westminster will mean fewer changes to fiscal and economic policy. Despite this, we expect a pull back in household spending and business investment which will exacerbate the slowdown currently being experienced.

“The fall in the pound has been smaller than expected given the hung parliament. At the margin, lower sterling will push up inflation a little further than previously forecast, which will have a small negative effect on household spending.

“The Bank of England is unlikely to change its policy in the near-term but it will offer reassurance that it stands ready to act in the event of financial instability.

“Looking ahead, there is a high chance that any Conservative minority government may not last beyond a year. It will likely struggle to pass any finance bill.”

Paras Anand, chief investment officer for equities in Europe at Fidelity International

“Whilst on first look, the result of last night’s election may be considered a negative surprise for markets, it is arguably more instructive for investors to focus on the muted reaction across equity, currency and bond markets.

“The first point to stress is that whilst a hung parliament was not the specific outcome that many expected, asset prices in the UK and to a certain extent globally, already discounted a period of extended political uncertainty given the complexity of delivering on the outcome of last year’s EU referendum. Simply put, that we are facing a period of political uncertainty is nothing new.

“Second, this uncertainty has led to the UK market looking attractively valued on a longer term perspective particularly against other global markets and this will also account in part for the absence of reactive selling pressure. Our role as bottom-up investors is to focus on the long term prospects for individual companies rather than make short term market predictions.”

 Caroline Simmons, deputy head of the UK investment office at UBS Wealth Management

“Given the lack of clarity on domestic policy and the impact on the Brexit negotiations, we expect sterling to remain soft. This should remain supportive of the equity market, under a Conservative minority outcome.

“However, should the market focus on concerns that a Conservative minority won’t last and that we may ultimately end up with a Labour-led parliament, then the currency related boost will likely be offset by concerns over the potential for increased corporate tax rates and nationalisations of certain industries.

“We expect the FTSE 100, which generates only 30 per cent of its revenues in the UK, to outperform the FTSE 250 which has a more domestic exposure of closer to 50 per cent.”

Eric Lonergan, fund manager at M&G Investments

“The market response looks predictable. Sterling weakness is the focal point. This is consistent with the narrative that an increased Conservative majority would improve Brexit negotiations. This is not an argument I am convinced by, so I wouldn’t be surprised if this weakness reverses.

“I don’t expect much reaction from gilts or the stock market. The outlook for interest rates doesn’t really change, nor does the outlook for corporate profitability.

 “I am not convinced the outlook for Brexit changes, because I suspect that the European position is not really up for negotiation. There is still a material risk of no deal, and however low the probability of another referendum is, I suspect that probability has risen.”

Trevor Greetham, head of multi asset at Royal London Asset Management

“The UK will have a weak government with no clear mandate heading into Brexit talks, the exact opposite of what Ms May intended when a 20-25 per cent polling lead tempted her to call the snap election.

“Markets don’t like uncertainty. We are likely to see bouts of political risk aversion like those after the Leave vote in last summer’s EU referendum but on a smaller scale, with sterling weakening, gilt yields dropping and mid cap stocks underperforming the more international FTSE100.

“Longer term, it is harder to call. The need to compromise in parliament may lead to a softer Brexit stance than would otherwise have been the case and this could ultimately end up positive for the pound.”

Andrew Belshaw, head of investment management at Western Asset Management

“Know when to hold them, know when to fold them. Words Prime Minister May should have heeded when she took the decision to gamble the certainty of three years in office against the prospect of a larger and longer mandate. The result today is clear. She gambled and lost.

“We now enter a period of uncertainty. The biggest question is over what this means for Brexit. May went in to the election seeking a strong mandate. She hasn’t got it. Will this lead to a softer Brexit which could include remaining inside the customs union? It may well, and the relatively muted reaction of sterling (a decline of only around 2 per cent versus the dollar and the euro) to the result may reflect that.”

John Wyn-Evans, Head of Investment Strategy at Investec Wealth & Investment

“So now what? This is where the speculation begins. Obviously, with Brexit negotiations due to start in 10 days, the Government does not appear to be in a strong position. Moreover there are strong calls for the Prime Minister’s resignation, and not just from outside the party. This raises the biggest point of future uncertainty. Will she go? And if she does, will the party go for a hard or soft Brexit prime minister? Until this is resolved it is difficult to make further strong asset allocation decisions. However, ongoing uncertainty potentially leaves sterling under some pressure. It is certainly hard to see it rallying strongly.”

Paul O’Connor, head of multi-asset at Janus Henderson

“On balance, the election outcome should be interpreted as representing a shift in the UK’s stance away from the sort of “hard Brexit” that Ms May was pursuing towards softer outcomes. However, the risk of a “no deal” scenario is now probably greater, given the chaotic state of UK politics and the challenging Brexit timetable.

“The general rise in uncertainty emanating from this inconclusive election outcome is clearly a negative for UK business, consumer confidence, and ultimately growth. However, this might be counterbalanced by the easier fiscal stance now seems likely to emerge.

“We retain our core view that the UK economy is set for a low (1-2 per cent GDP) growth trajectory for a few years until uncertainty surrounding the Brexit process can be decisively dispelled.

“Against this backdrop we remain wary of exposure to the UK economy and retain a cautious view on sterling. While the currency has already fallen a long way, it is likely to retain a negative bias until macro momentum has stabilised and political uncertainly has eased.”