UK Election 2017

What does the result mean for investors? Voters have cast their verdict and elected the government tasked with negotiating the UK’s exit from the European Union. M&G’s investment teams have shared their views on what impact the election will have for markets and investors.

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The views expressed in this section should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Please refer to the glossary at the end of the page.

Latest updates From M&G's investment teams…


UK Election 2017: What the hung parliament means for investors

12.45PM, 09.06.17

The Conservative party has lost its parliamentary majority in a UK election that had been widely expected to strengthen its position in government.

While Theresa May has confirmed her intention to remain prime minister and form a government, her party fell short of retaining a majority by a handful of seats.

To help the Conservatives form a working majority in parliament, it is anticipated that the Democratic Unionist Party (DUP), of Northern Ireland, will offer its support and votes on key issues.

Jim Leaviss, head of the retail fixed interest at M&G, said that the slender working majority created under a Conservative-DUP pact would struggle to pass legislation effectively, making a second election later in 2017 a strong possibility.

“For an election designed to deliver a ‘strong and stable’ government, the result has delivered renewed uncertainty and seems unlikely to help the UK’s negotiations with the European Union (EU), which are due to start this month.”

“However, the result means there is a reduced risk of a ‘cliff edge’ Brexit, where the UK could leave the EU single market without any agreements. Such an outcome would be extremely damaging for the UK economy.”

Steven Andrew, a fund manager in M&G’s Multi Asset team, said that while the outcome of the UK election pointed towards a rejection of ‘Brexit’ at any cost, by many voters at least, this is not to say that the result will necessarily have much bearing on the outcome.

“In terms of the ‘Brexit’ negotiations, it is tempting to conclude that a ‘hard Brexit’ is now ruled out. This is probably a mistake. It is far from clear that any sensible conclusions can be drawn with regard either to what the settlement between the UK and the EU will look like, or on the development of eventual trade deals.”

The only real movement in markets immediately following the UK election result was a fall of around 2% in the value of the UK pound relative to the US dollar and the euro. Andrew compared this “undramatic” currency movement with those that accompanied much more significant episodes in UK politics, such as the vote to leave the EU in June 2016.

“All in all, the reaction of markets is to shrug off this result. The outcome of the election, while clearly a surprise relative to expectations just a few weeks ago, seems broadly consistent with the trend in opinion polls in the run-up to the vote.”

The political uncertainty that accompanies a hung parliament – especially with upcoming negotiations on the terms of Brexit – could create opportunities for long-term investors, Andrew added.

“As time passes, market attention will eventually refocus on fundamentals, in my opinion. Appraising the UK investment landscape suggests that UK share prices remain attractively priced, as an asset class, especially in the context of a robust UK and strengthening global economy.”

Andrew said that it is important for investors to ask themselves whether they are being compensated – in the form of prospective returns – for the risks that they are taking. “In my opinion, with the UK pound looking cheap, investors can find better value in UK company shares than in those assets seen as ‘safer’, not least UK government bonds.”

However, UK economic growth, which beat forecasts in 2016, has been losing momentum during the course of 2017, said Leaviss. “The UK is a consumer-based economy, and the decline in real incomes, after the effects of inflation, has weakened prospects of growth. The election result does little to change that. This does not feel like a ‘risk-off’ event.”

“While inflation has been rising, the Bank of England is unlikely to raise interest rates because it is largely a result of the weaker pound making imports more expensive. Higher borrowing costs would only hurt consumers more, and in turn hit spending and stunt economic growth.”

“In terms of fiscal policy, it is possible that there may be less austerity under a weakened Conservative-led government, if not any likely deviation from its national debt targets.”

“If we do have a second election this year, it is clear that a resurgent Labour party under Jeremy Corbyn has the momentum, having gained seats in this vote. Many of the party’s policies, including nationalising certain industries, could create risks for UK investors. For the moment, however, they are being compensated for this risk.”

The views expressed in this document should not be taken as a recommendation, advice or forecast.

We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.

The value of investments will fluctuate, which will cause fund prices to fall, as well as rise, and you may not get back the original amount you invested


UK Election 2017: First views from the desk

9.30AM, 09.06.17

An election called to strengthen the UK’s Conservative government has delivered a hung parliament, with Theresa May’s party losing the majority it previously held.

The Conservatives have retained the largest number of seats in parliament, but will have to negotiate the formal or informal support of another party – potentially the Northern Irish Democratic Unionist Party – to govern with a working majority.

Here are the initial views from M&G’s investment teams on the election’s impact on markets.

Jim Leaviss, head of the retail fixed interest at M&G 

“For an election designed to deliver a ‘strong and stable’ government, the result has delivered renewed uncertainty and seems unlikely to help the UK’s negotiations with the European Union (EU), which are due to start this month.”

“The bond market’s initial response to the election result has been muted, and the initial fall in the value of the UK pound against the US dollar and the euro overnight was limited – only around 2%.”

“The momentum of UK economic growth has been fading as we move through 2017. Retail sales growth, house prices and incomes, after the effects of inflation, are all weakening. This election result, and the continued uncertainty it brings, suggests that this trend will continue.” 

Steven Andrew, a fund manager in M&G’s Multi Asset team

“Amid the noise that has accompanied this election result, there are three aspects worth investors’ attention – first, what the election outcome means for markets in the short term; second, what it means for the ‘Brexit’ negotiations; and third, what might be the longer-run implications for the economy.”

“All in all, the reaction of markets is to shrug off this result. The outcome of the election, while clearly a surprise relative to expectations just a few weeks ago, seems broadly consistent with the trend in opinion polls in the run-up to the vote.”

“In terms of the ‘Brexit’ negotiations, it is tempting to conclude that a ‘hard Brexit’ – where the UK would leave the EU single market at all costs, even without any deals – is now ruled out. This is probably a mistake. It is far from clear that any sensible conclusions can be drawn with regard either to what the settlement between the UK and the EU will look like, or on the development of eventual trade deals.”

“As time passes, market attention will eventually refocus on fundamentals, in my opinion. Appraising the UK investment landscape suggests that UK share prices remain attractively priced, especially in the context of a robust UK and strengthening global economy, and given how expensive many assets seen as ‘safer’ can be.”

Eric Lonergan, a fund manager in M&G’s Multi Asset team

“The market’s initial response to the election result was to be expected. The fall in the value of the UK pound is consistent with the narrative that an increased Conservative majority would improve the UK’s hand in Brexit negotiations.” 

“This is not, however, an argument that I find convincing, as I suspect that the EU’s position is not really up for negotiation. In my opinion, the outlooks for UK interest rates and corporate profitability aren’t really moved by this result.”

“Standing back from the initial market noise, the result provides evidence that non-nationalistic political narratives still resonate with UK voters. It is not only the Conservative party that have seen its position weakened, but also the Scottish National Party and the UK Independence Party.”

“However low the probability of another referendum on the UK’s relationship with the EU, I suspect that probability has now risen.”

The views expressed in this document should not be taken as a recommendation, advice or forecast.

We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.

The value of investments will fluctuate, which will cause fund prices to fall, as well as rise, and you may not get back the original amount you invested


Please note this is an archive. The information contained below should not be taken as current views or opinions but should be used for historical reference only.

Article 50: What can we know?

Steven Andrew, fund manager in M&G’s Multi Asset team
29 March 2017

Leaving the European Union (EU) could be the most significant change to the UK economy in a generation. Then again, the impact might be so small, we may not even notice.

Much hinges on the negotiations – and ultimate settlement – on the terms of ‘Brexit’, of course. There is also a full spectrum of opinion on what the UK’s future bilateral trade deals with the rest of the world will look like.

Clarity around these issues is unlikely to prevail for some years yet. So, from an investor’s perspective, listening to market noise and rushing to judgement either way is not a good idea. Successful investing is not the same thing as predicting outcomes. Instead, investors would do well to take a step back and assess what is really going on.

We know that the UK economy remained stronger than many expected in the wake of last June’s referendum, growing by 2% overall in 2016. Despite this, forecasts for future growth are downbeat.

The Organisation for Economic Co-operation and Development (OECD) has projected that UK growth will slow to just 1% in 2018 in stark contrast to its forecast for global expansion of 3.6%, up from 3% last year.

This pessimism could be proved right, of course. The impact of Brexit will be very real, and there are certainly reasons to think it could hurt the UK economy. However, with preoccupations on worst-case scenarios, there is every chance that upside uncertainty is not being taken into account when pricing asset values.

UK company shares are a case in point. Despite all the gloomy forecasts for the economy, in 2016 UK-listed companies delivered their strongest year-on-year profits growth since the recovery from the financial crisis in 2010. Overall, profit growth among companies listed in the FTSE All-Share index outpaced share price growth in the year to March 2017. According to this one measure, comparing share prices to profits, UK shares therefore became cheaper – despite their strong performance.

Given the UK economy has defied expectations of a post-referendum slowdown, it might be worth considering interest rates. The view that the Bank of England will keep base interest rates at their record low is predicated on a slowdown in economic growth. In my view, a higher pay rise for UK workers could be an early precursor of an interest rate rise.

With unemployment close to 40-year lows and consumer price inflation already having edged up to 2.3% in February, and expected to rise further this year, the Bank could easily justify raising base interest rates if wage growth is also on the up.

This would be a jolt to many investors. As ever, where market beliefs become detached from facts, it creates opportunities for those investors who take a long-term view.

We need to expect that attention on Brexit will wax and wane in the coming years and, as investors, be prepared to respond as it does rather than getting caught up in the noise.


Article 50, political risk and the markets

Steven Andrew, fund manager in M&G’s Multi-Asset team, explains his view of political risk and the impact that Brexit has had on his investment outlook.

View the video transcript

Glossary:

Asset: Anything having commercial or exchange value that is owned by a business, institution or individual.
Bond: A loan in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid.
Equities: Shares of ownership in a company.
Fiscal Policy: Government policy on taxation, spending and borrowing
Fundamentals (economic): A basic principle, rule, law, or the like, that serves as the groundwork of a system. Economic fundamentals are factors such as inflation, employment, economic growth.
Government bonds: Fixed income securities issued by governments, that normally pay a fixed rate of interest over a given time period, at the end of which the initial investment  is repaid.
Index: An index represents a particular market or a portion of it, serving as a performance indicator for that market.
Inflation: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.
Risk: The chance that an investment's return will be different to what is expected. Risk includes the possibility of losing some or all of the original investment.
Underlying value: The fundamental value of a company, reflecting both tangible and intangible assets, rather than the current market value.