Markets hate surprises. A few months ago Conservative Prime Minister Theresa May looked set to increase her majority after calling a snap election. The unexpected hung parliament that materialised on Friday morning sent the pound crashing by around 2% against the dollar and euro.
Sterling is weakening over uncertainty around who will form the next government and what it will mean for the economy and the upcoming Brexit negotiations.
But investors with blue chip stocks in their portfolios could benefit from the general election result. The FTSE 100 opened almost 0.8% higher to 7,508.8 as its constituent stocks’ international earnings benefit from a weaker pound.
Those with exposure to the more domestic-facing FTSE 250 will not enjoy such benefits with the index trading 0.6% lower at 19,633.1. This perhaps reflects how vulnerable investors see the health of the economy, which grew by a modest 0.2% in the first quarter.
Columbia Threadneedle head of UK equities Richard Colwell does not expect to see a sell-off of London-listed stocks.
“The UK market has been out of favour with international investors for some time,” he added. “Asset allocation to UK equities is already as low as it was in 2008 at the height of the banking crisis, so there is no sense of hot money leaving the market.”
Investors have not fled to UK government debt either.
Yields on 10-year gilts remain steady at around 1%. Kempen Capital Management reports that moves into longer dated yields, which have a greater impact on the funding ratios of pension schemes, are also broadly unchanged.
“As a whole these moves are likely to be broadly neutral for the majority of pension funds,” the firm said in a release. “UK equities have risen slightly and those companies that own foreign currency assets will also have benefited. However, yield moves have, on balance, moved down pushing up the value of scheme liabilities.”
Uncertainty
“May’s gamble has backfired epically, ending in an own-goal,” Principal Global Investors’ investment strategist Seema Shah said.
“With uncertainty lingering heavily in the air, markets have not received what they really wanted,” she added. “Sterling will suffer a heavy beating today and could continue to weaken over the coming weeks as the Conservative Party tries to form a government, perhaps elects a new leader and also, takes a long hard look at what went wrong.”
Shah added that it is difficult to see the election result leading to a harder Brexit. “For that reason, sterling’s long-term outlook is brighter than its short-term outlook.”
Hymans Robertson’s head of investment consultancy, John Walbaum, agreed that a softer Brexit could now on the cards.
Walbaum added that the only thing that is certain is more uncertainty.
There is a fear that the in-coming coalition government might put some of the pension policies in their manifestos on the backburner, such as ditching the triple lock and reforming pension tax relief.
JLT Employee Benefits head of technical John Wilson said state and private pension challenges will be harder under a hung Parliament if we are to build trust in the system and encourage more saving.
“The extension of The Pension Regulator’s powers to stop some of the unsettling headlines is all well and good, but such preventative measures need to be part of a wider settlement to plug the pensions black hole in defined benefit schemes,” Wilson added.
“And, although automatic enrolment has led to more people saving, the average contribution rates are woefully inadequate and we need to keep nudging people in the right direction.”
Walbaum wants the new government to take a sensible approach to the regulation of defined benefit (DB) pensions.
“The aftershocks from BHS are still being felt across the DB universe,” he added. “You cannot argue with the rhetoric of protecting pensions from unscrupulous bosses.
“However the reality is that this reckless behaviour is in the very small minority. Developing law to deliver the Conservative’s manifesto promise would have been fiendishly difficult.”
The debate around what the general election will mean for pensions does not end with the vote.
