UK Election Result: Grounds for Optimism in the Medium Term?
The UK election result came as a shock to most observers, but early indications suggest financial markets don’t view it as an “end of the world” scenario.
And there are indications that some positives could emerge over the medium term—if the result leads the United Kingdom to adopt a softer approach in its Brexit negotiations.
A Predictable Response
So far, the reaction has been largely as we would have predicted in this scenario.
The pound has fallen, but to put that into perspective, it’s still stronger against the US dollar than it was when Prime Minister Theresa May called the snap election in April.
From a sector point of view, companies seen as defensive and with international earnings have flourished in the immediate aftermath of the vote.
Most of these companies that earn a significant amount of earnings overseas don’t rely on the United Kingdom for earnings. A little bit of weakness in the currency tends to help them.
On the other hand, UK domestic-orientated stocks, including house builders, general retail stocks, real estate and UK-focused banks, have suffered in early trading.
In relation to the UK domestic economy, investors may be concerned that companies could postpone investment decisions and consumers could stop spending until there is greater clarity over the way forward.
Whether that happens, or whether people will respond as they did after the Brexit vote and carry on regardless, remains to be seen.
One slight surprise has been the rebound among utility stocks.
Many utility and energy stocks had been weak after both major UK parties pledged potential caps on energy bills. Even oil stocks were up in early trading on June 9, despite a falling oil price, because the weak currency helps dividend payments in sterling.
A More Nuanced Brexit?
One potential positive from the result could be a more nuanced approach to Brexit negotiations.
When Theresa May called this election, many observers viewed it as a referendum on her hard-line Brexit approach. One could argue that voters’ apparent rejection of May’s approach should signal a softer approach to leaving the European Union (EU).
The election outcome could mean that all the tough talking about a potential hard Brexit could ease.
That might be beneficial for sterling over the longer term.