‘Do you ever get the feeling that the only reason we have elections is to find out if the polls were right?’ – Robert Orben
After weeks of campaigning, rhetoric and crises the UK General Election of June 2017 is finally reaching a conclusion. With voting now closed the customary exit poll is the first chance for the world’s financial markets to opine on the potential new UK political realities.
Three financial market metrics tell you everything you need to know in terms of a reaction.
The first of these metrics is the good old British Pound.
Last June’s Brexit referendum shocker sent off a chain reaction of impacts that saw Sterling battling with the Argentine peso and Turkish lira – among others – for the title of the worst performing currency from an above-average sized country globally.
Now whilst there has been precious little clarity on the whole Brexit negotiation debate, 2017 has seen the Pound scrabbling back a little bit of ground as global investors realise that the UK economy is inexorably going to fade into recession.
Today’s exit poll showing an anticipated ruling Conservative Party with no immediate majority unsurprisingly has immediately had a negative reaction on the British currency.
Currencies always like the certainty of a majority government but with one eye on the Brexit negotiations to come, the lack of a big majority means that the Conservative government will enter negotiations over the next year overly beholden to the small ‘get out of the European Union at any costs’ group of Members of Parliament. In modern day parlance say hello to heightened potential issues around Brexit.
In short if you have booked a summer holiday outside of the UK and at some point you will need to change your Pounds for another currency it is not good news.
Second, surely mixed news for the UK currency must also be mixed news for the UK stock market? In most cases – to use a mathematical terms – the two are positively correlated which is a technical way of saying they both go up or down at the same time and certainly the immediate reaction to potentially no majority for the ruling Conservative government has been negative with the UK stock market expected to open down in Friday trading.
Not great news for anyone with a pension fund then – you are that bit poorer theoretically after the exit poll publication.
However don’t be fooled that this is bad for ALL UK shares over the next few weeks and months. During the second half of 2016 the sharp drop in the value of the Pound helped boost leading UK share indices as all the overseas exposures that the typical UK corporate has – especially in the mining, energy, pharmaceutical and industrial areas – helped take the leading UK indices to new all-time highs.
With the Pound under pressure again these overseas exposure shares are going to look attractive again versus those with greater domestic exposures.
Fund managers around the world who invest in the UK are going to have a busy old time chopping and changing.
The final metric you should look at is the gold price which currently little changed. Gold is typically a safe haven in times of strife and this seemingly uncertain UK electoral backdrop contrasts with the last few hours that have seen not only a relatively benign comments from the European Central Bank and the Comey testimony in Washington DC that have intrigued but not shocked.
Overall, the reaction of the global markets tells us that the interpretation of the UK General Election exit poll is that the Pound is going lower, Brexit will be potentially tougher to negotiate, internationally-oriented UK shares are going to be stronger…and UK political life is going to get more uncertain again.
Now all we need are some real results to confirm or deny all the above. Who said UK politics is boring?