What does political turmoil mean for UK markets?

The pound initially rose a little, as investors concluded, optimistically, that we may be at the start of a more stable period in British politics. However, this movement is negligible in the context of the currency’s recent weakness. Rising interest rates in the US and poor economic data from the UK have pushed the pound lower recently and it continues to trade around the $1.20 mark, on a par with its lowest levels in over 30 years*.

Over the long term, other factors are likely to exert more pressure on the pound. It is a cyclical currency at a time when the global economy is weakening, and investors are increasingly cautious. They typically prefer the relative safety of the US dollar, particularly given the aggressive rhetoric from the Federal Reserve. The US central bank has made it clear that its priority is to tackle inflation and economic growth comes second, while the Bank of England has been more tempered in its response.

The UK stock market comprises large, multi-national corporations whose fortunes are not tied to the UK economy. As such, it is difficult to suggest that the political uncertainty could affect the long-term outlook for, say, AstraZeneca, or BP. There is a plausible scenario where an incoming administration seeks better relationships with its important trading partners to the benefit of all UK companies that trade internationally.

The UK market remains cheap by historical standards and the uncertainty surrounding the UK is largely priced in. The UK market has not fully recovered from the Brexit vote and valuations remain attractive. International investors have continued to avoid the region and the current political uncertainty may prolong this, but it does not change the fundamentals for UK businesses.

Equally, the UK stock market is well known for its bias to ‘value’ areas such as financials, energy, and mining. This means that the outlook for global economic growth, inflation and interest rates are likely to exert greater force on its performance than the ebb and flow of domestic politics. It remains too early to judge whether Johnson’s administration will be replaced by a government of fiscal discipline or higher spending. This will ultimately have an impact, but to make predictions would be perilous.

In the short term, markets are often buffeted by events that seem significant but often have little impact long term. Ultimately, some measure of political turmoil has long been priced into the UK market. We continue to focus on what really matters which is company fundamentals and the long-term outlook.

We encourage investors to take a much broader view and look to take advantage of opportunities globally, with the UK forming only a part of a well-diversified portfolio. Of course, the present situation is uncomfortable, but investors should be patient and not be shifting their portfolios around as a result of the current political drama.

*Refinitiv