It’s probably safe to say that markets are like weather vanes, they stay stable when everything is calm but can spin around frantically when the wind keeps changing direction, or even if they just pick up on the fact that it might. Right now, the two big “trade winds” blowing the UK markets are the election and Brexit so let’s have a look at both.
Even though we’re looking at the election and Brexit as separate issues, the reality is that they’re closely intertwined. Article 50 was triggered on 29th March and a general election was called on 19th April (after a Commons Motion). Theresa May has stated openly that she wishes to strengthen her mandate in Brexit negotiations. While this could be taken to mean that she wishes to free herself of potential hindrance from opposition parties, particularly those with pro-Remain leanings, it also has to be noted that at this point the Conservatives only have a very small majority, meaning that their own backbenchers hold a lot of power. If an election returns a larger number of Conservative MPs then consequently the power of individual backbench MPs will be diluted. This then begs two questions. Firstly, how likely is it that the Conservatives will win with an increased majority and secondly what would this mean in practice. Well, opinion polls have put the Conservatives well ahead, but given that opinion polls have been so dramatically wrong in the recent past, it’s hardly surprising that some people may be unimpressed by this. On the other hand, in the UK, the majority of parliamentary seats relate to English constituencies and in England, the Conservatives’ main opposition is Labour, followed by the Liberal Democrats, neither of which are in particularly good shape at the moment, hence it is certainly a feasible possibility. What it means in practice, however, will depend on the views of the specific, elected MPs. In other words, if the new MPs are largely pro Europe/soft Brexit then this will presumably influence government policy and vice versa. If, however, there is a roughly even split in views, then one very probably outcome is that the government will be able to get through the measures it wants with the support of the MPs who are in favour of their approach.
Whoever is elected on 8th June 2017 and whatever their views on life, the universe and everything, there can be little doubt that this forthcoming parliament will go down in history as the Brexit parliament and that Brexit will probably be what defines it. One theory which has gained traction on the internet is that Theresa May herself is actually in favour of a soft Brexit, but is currently hamstrung by the power of her hard-line, anti-EU backbenchers, who have a particularly strong degree of leverage at the moment due to her small majority. The evidence in favour of this is mainly the fact that Theresa May backed Remain in the referendum (although she steered clear of campaigning on its behalf) and the fact that the letter she sent to invoke Article 50 referred to the “deep and special partnership we hope to enjoy” (with the EU). If “soft Brexit” translated as “access to the single market in exchange for continuing to accept freedom of movement”, this would probably go down very well with the markets.
The prospects for investments
While it’s understandable that issues relating to the election and Brexit are dominating news headlines, when looking at investments it can be worthwhile looking at the bigger picture before honing in on the details. First of all, there are some markets which are probably going to feel little to no impact from Brexit. For example, the chronic under-supply of property (and in particular housing) in the UK means that it’s reasonable to expect that market to stay strong regardless of the Brexit situation. For other markets, as is generally the case in life, there will be winners and losers and the winners will generally tend to be those, which are supported by strong fundamentals and are built on clear and compelling value.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.