Keeping up with Les Joneses: how the snap election may help smaller companies

25th April 2017

Clive Hale, director of Fund Calibre sees a possible investment opportunity amid the politicking.

Not to be outdone by her European counterparts, Theresa May decided to call a snap election for the UK, which adds to the upcoming voter-fests in France with its final run off in two weeks, Italy and Germany. While I, for one, am getting pollster fatigue, it seems she is still a believer.

May had said that stability was the most important issue and an election might undermine that, but with the opposition parties, the unelected House of Lords, not to mention the Clarkeite wing in her own party, all ‘conspiring’ one way or another to make her life harder than it needs to be in negotiating Brexit, she has changed her stance.

The current batch of polls gives her a 20-point lead and seems to have been just too good an opportunity to miss to increase the Conservative working majority in Parliament and give her more room to manoeuvre during negotiations.

Initial market reaction

The initial market reaction was a function of the extraordinary strength of sterling, which was up more than 2% on Tuesday. As is the current nature of the UK stock market, if sterling is strong then the market is weak, so the FTSE fell 2.5% by the close and continued to fall into the early evening. Sterling strength dilutes company earnings from overseas, hence the inverse correlation between the two asset classes.

After a significant rally since the EU referendum vote was announced, it is not surprising to see the market in a corrective phase, and it may go lower from here and perhaps not recover until June when the result will be known.

There have been similar corrections in Europe, particularly were anti-EU and immigration candidates were doing well.

Longer term outlook

While the snap election will likely increase volatility in the coming months, ultimately, a stronger hand in negotiating Brexit should be positive for the stock market (although May’s credentials as a Remain supporter in the referendum campaign still carry more than a few question marks).

And while the pound has bounced back this week, it is worth remembering it hit a three-decade low against the dollar at the start of the year, so still has some way to go until we can talk about a recovery.

The general direction of things does seem to make the UK’s medium and smaller-sized companies look more attractive though, with the latter especially looking cheap when compared with those in the FTSE 100. They are less affected by sterling’s gyrations and they don’t generally come back as much as the FTSE 100 when there’s a decent correction, as all the liquidity is in the larger companies.

For any early-bird investors looking for ideas in this new tax year, funds like Franklin UK Mid Cap, Liontrust UK Smaller Companies and Marlborough Special Situations may be worth a look.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive’s views are his own and do not constitute financial advice.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *