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1 June 2017

UK election just a sideshow to Brexit

With Jupiter Distribution's Alastair Gunn and Rhys Petheram

With just a week to go until the UK's general election and the polls suggesting the Conservative lead over Labour is shrinking, Alastair Gunn & Rhys Petheram, co-managers of the Jupiter Distribution fund, say the outcome – whatever it is – will do little to ease uncertainty.

Brexit: like the sword of Damocles

Describing Brexit as 'hanging like the sword of Damocles over markets', they believe any stock market moves post the election will be short-lived before markets once again turn their attention to the negotiations to leave the EU.

“The outcome of this month’s general election does little to alter our view that the companies we invest in need to prepare for the UK’s full exit from the European Union. The sooner we know what the rules of the game are for future trade with the rest of the Europe, the better it is for everyone,” Rhys said.

“The recent wave of populism that has seemingly engulfed many Western developed nations has been a deeply de-stabilising factor for business. Whichever party wins power needs to create a narrative that is more constructive around business and that involves creating a framework that is going to make the UK a more attractive place to do business.”

The pound and the FTSE: higher or lower?

“Sterling is having a tough time as polling day in the UK draws closer, reflecting concern the Conservatives may not achieve the overwhelming majority they want to play a strong hand in the Brexit negotiations,” continued Alastair. “This comes at a time when the UK economy is also showing signs of slowing down.”

“If the Conservatives do get a bigger majority than they have now, markets, in our view, will react positively and sterling should strengthen a little. The knock-on effect, from a stock perspective, might be a modest rally in the shares of companies that do most of their business here in the UK.

“The post-Brexit decline in the pound has raised the cost of imported raw materials many of these companies need to produce the goods they sell to us, and there has been pressure to pass on these higher costs to the final customer. A rising pound might shield the UK consumer from these rises at a time when incomes are seeing a real squeeze. We would caution, though, that the pound’s gains may be modest – no more than a few percentage points rise.

“In the event of a Labour party victory, the direction of sterling is less clear. We could see a 'Trump effect' where the likelihood of increased government spending takes pressure off the Bank of England on the expectation benchmark interest rates will also start moving up sooner than initially thought – such a move would likely strengthen sterling.

“As a counterbalance, potential inflationary pressures linked to Corbyn’s policies, and general uncertainty on how a Labour government might proceed would likely weigh. For example, a move such as to raise corporate tax might prove counter-productive. In the current environment, there needs to be an incentive for businesses to continue to relocate here, and raising corporate tax does not, in our view, send the right signal. Talk of implementing a financial transactions tax is similarly unhelpful given the threat Brexit poses to the country’s financial services industry.”

Alastair and Rhys have jointly managed the Jupiter Distribution fund since July 2010. The fund has an approximate 70:30 ratio between holdings in bonds and shares. The managers attend company meetings together and decide not only whether or not to invest, but if the investment would be best made via the company’s equity or debt.

Where to next?

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. The managers' views are their own and do not constitute financial advice.