In Scope:

UK Election: May gambled and lost 

June 9, 2017

 

Prime Minister Theresa May has stumbled following the UK general election on 8 June. She called an early election in the hope of winning a firmer mandate from voters but was unable to do so. The Conservatives’ failed gamble increases uncertainty at political level, but also for the Brexit negotiations due to commence this month. This is not a reason to adjust our investment strategy.

 

May loses absolute majority

The results of the UK election weaken Theresa May’s Conservative Party in parliament. A party needs 326 seats to secure an absolute majority in the House of Commons. As the count stands, the Conservatives have failed to achieve this objective, winning 318 seats – down by more than ten compared to the previous
number, even though the party received 5% more votes this time. The opposition Labour Party, by contrast, benefited much more significantly from the implosion of the Brexit-supporting UKIP (-11%), with a gain of almost 30 seats. To secure a majority in parliament, the Conservatives will have to call on a smaller party with a different political agenda. The Northern Irish Protestant DUP (ten seats) is the most likely candidate.
 
The decision to call an early election in April came in response to opinion polls suggesting that the Prime Minister’s party could substantially increase its power in parliament. It seemed like an ideal opportunity for May to consolidate her leadership. She replaced the former premier, David Cameron, after he lost the Brexit referendum and did not have an electoral mandate of her own. In this way, she wanted to achieve a better position within her party in order to lead the negotiations with the European Union. May’s hoped-for scenario did not come about. British voters were motivated primarily by domestic issues: welfare, healthcare and security.
 

Heightened political uncertainty

The Conservative Party’s poor election performance will translate into heightened political uncertainty. The question now is whether Theresa May will remain in power. Either way, the British Prime Minister’s position in the Brexit negotiations with the EU appears to have been weakened, which might make it harder to achieve a compromise. The likelihood of delay and a souring of the atmosphere has increased. All the same, a second Brexit referendum – on which certain people have been pinning their hopes for the past year – remains unlikely. The most important risk is still a crisis sparked by the lack of an agreement in this acrimonious divorce between the UK and the EU. The chance that this will happen has now increased.
 
Financial markets don’t like uncertainty. Increased nervousness has been limited to the UK currency, which fell 2% in value this morning. The weakening of sterling often fuels an increase in value of British shares, which are extremely international in their orientation. The impact on the other markets remains limited. The results of the election will not have any immediate impact on the UK economy and even less on the global economy. Nor will they have any direct policy implications for the central banks. There is no reason for panic, therefore, on either the equity or bond markets.
 

Investment strategy* remains on course

There are a number of risks on our radar, which could trigger a financial market correction. All the same, the general outlook remains extremely attractive for international shares, thanks to a favourable economic climate, improved earnings forecasts and supportive central bank policy. Investor confidence is high, though, which means that most stock markets are a little more expensive on average. Bonds, on the other hand, particularly government paper, are not attractive because they are extremely expensive. We therefore prefer equities but are also retaining the necessary scope to increase the bond holding if purchase opportunities arise.
 
We are not adjusting the investment strategy. Our sterling recommendation has been negative for some time now. The UK currency weakens whenever there is an increase in risks and uncertainties and this is also what has happened this morning On the economic front, the UK’s growth engine is slowing down, which is less favourable for businesses. This makes the UK stock market less attractive. For some time now, we have given preference to stocks from the euro area (especially Germany) and to the Asian growth countries, regions in which we detect increasingly positive signals.
 
 (*) The investment strategy described in this document relates to all investment funds (undertakings for collective investment) managed by KBC Asset Management NV, which make explicit reference in their investment policy, as laid out in the prospectus, to KBC Asset Management’s investment strategy. The stated strategy is not, therefore, altered in the case of other investment funds, the investment policy of which does not refer directly to KBC Asset Management’s investment strategy. It is possible that these investment funds are managed in a way that differs from the investment strategy. You should always read the prospectus and the Key Investor Information Document for the relevant investment fund.
 
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