Tony Byrne’s View 12th June 2017
So Theresa May and the Tories have made a complete hash of the snap election and lost their majority in the Commons as a result. This was a classic case of a gamble that went wrong.
George Osbourne’s Evening Standard renamed May as Weak and Wobbly rather than Strong and Stable which I think is an apt description of her leadership so far. Unlike Margaret Thatcher who famously stated “The lady is not for turning” Theresa May is continuously making U turns. The electorate does not like weak leaders so she has been punished accordingly.
So what effect if any will this have on investors? Well as I write this blog the conservatives are in talks with the DUP to obtain their support in voting in the Commons but not to form a coalition as such. This has shades of the Lib Lab pact of 1974 which led to another general election just 6 months later. It wasn’t a success but who knows whether or not the DUP Tory pact will be a success either.
What we do know is that a pact or a coalition with another party can only weaken the governing party which will have to do deals and make compromises with the smaller party. That may not necessarily be a bad thing if it forces Theresa May and her government to be less arrogant and softer in its approach.
In the short term Sterling has weakened a little which has boosted the stockmarket especially the larger Blue Chip companies in the FTSE 100 Index because 80% of their earnings are from overseas. So for now the combined effects of Brexit and the General Election have been positive over the last 12 months for the UK stockmarket. The downside is that inflation is likely to rise further because imports will now be even dearer.
So it’s good news for stockmarket investors and bad news for savers with bank deposits as they will continue to receive average returns of 1% or less whilst inflation is currently 2.7% so losing money in real terms by about 1.7% a year. It is generally considered healthy for an economy to have a little inflation so overall, savers aside, it’s no bad thing.
Personally I wouldn’t be at all surprised if there is an other General Election before the 5 years term of the government has finished but hopefully it won’t be until the Brexit negotiations have been concluded. It is vital to have a period of stability before we have another General Election. After all the public is getting Election weary.
What is important to understand is that the stockmarket prices shares based on the prospect for future earnings growth of publicly quoted companies. If the market rises, that is a positive sign. It means that Brexit isn’t considered likely to affect the UK economy adversely. In fact it’s quite the opposite. So overall that’s good news for investors.