Charles Hepwoth, investment director at GAM: “Sterling has already registered the effects of the first shock wave from the election result, falling over 2% from yesterday. This will buoy FTSE large caps with their foreign earnings but will be negatively translated into domestic earners as inflationary pressures will continue to build. Expecting the unexpected is now de facto and we continue to be positioned in non-sterling assets, which will benefit our portfolios in the short term.”
Consumer stocks
Broadly speaking, consumer stocks linked to the domestic economy are likely to lose out compared to more internationally-focused businesses. However, some managers suggest there are tactical opportunities to be found.
RBC Capital Markets: “We view the prospect of a hung parliament as a short term negative for the UK general retail sector, although given a more muted reaction by sterling so far, nothing like as dramatic as following the EU referendum vote in June last year.
“In particular, we would see the election outcome as a negative for UK exposed businesses with high dollar sourcing costs. Discounters would also be particularly affected by any moves to increase further the level of the living wage and the sector by any reversal in the current government's plans to reduce the rate of corporation tax in the UK.
"Relative gainers short term would be ASOS and Kingfisher given their relatively high non-UK exposure. Uncertainty about government policy on items such as Brexit and the Budget will be unhelpful and probably be seen as a drag on consumers and businesses.”
“The result will be negative for UK assets such as commercial real estate and retailers,” says Martin Currie’s Michael Browne.
Miton’s David Jane: “There do appear to be some opportunities in the consumer services area, where expectations and valuations are very low despite the leading indicators remaining strong. Here we favour the pub and restaurant groups. In aggregate, UK consumer positions comprise one of our smaller macro themes as we’re able to find many attractive risk reward opportunities globally, particularly in the long term themes.”
Small caps
The smaller companies on the UK stock market are more closely linked to the fortunes of the domestic economy, although there could be value opportunities available now for those investors willing to take a long-term view.
Tom Stevenson, investment director for personal investing at Fidelity International: “Domestically-focused companies in the FTSE 250 and Small Cap indices face headwinds as sluggish domestic earnings and rising inflation deliver an effective pay-cut to British workers.”
OMGI’s head of UK equities, Richard Buxton: “Currency movements will inevitably have a significant bearing on the relative performance of the FTSE 100 and FTSE 250 indices. Weakening UK economic data have acted as headwinds to the more domestically-oriented small- and mid-cap markets. As such, although there remain pockets of expensively priced small- and mid-cap stocks, when viewed as a whole, the small- and mid-cap markets have been trading at cheaper valuations than their larger peers.”
