Prime Minister Theresa May stunned the nation by calling a General Election on April 18th, and shockwaves have been felt in the markets as well as throughout the nation. This tactical move by the PM is to seek a mandate to lead the country for the next Parliament and through the Brexit process. Re-election for the Conservative Party means they would go into Brexit negotiations with strong home support. It would also give Mrs May a boost of credibility as it was her party, not the electorate, that put her in the role of PM. As expected, such a decisive move has had an immediate impact on the markets. But as this political chess game plays out over the next few weeks, what will the financial implications be?
Interestingly, the pound was immediately strengthened following the Prime Minister’s announcement, a reaction attributed to the market confidence in a Conservative triumph. Should Mrs May win the vote, the theory is that much of the uncertainty surrounding Brexit and how the deal will be done will be answered. Sceptics have suggested it is far easier for the PM to gain support now, while any deal is vague, than afterwards, when she inevitably disappoints both hard-line Brexiteers and those who voted against us leaving the EU, with a deal that may be deemed unsatisfactory. Certainly, she can’t be held politically accountable by being voted out halfway through the two-year Brexit deal if she wins in June.
When Britain voted to leave the EU, the shock result saw the pound plummet. The decision to call an election was another big surprise, but the fact sterling reached a six-month high against the dollar proves confidence in the result is significantly higher this time. However, it did have an impact on the returns seen by UK investors who had their money in international funds while the pound devalued. Last year, those returns were significant as UK investors cashed in on the profits achieved by a weakening currency as the profits were converted from other world currencies (e.g. Dollar to Sterling). This could be turned around now as the pound continues to rally due to the snap election. The FTSE 100 fell 2% after the election news, putting a dent in the gains enjoyed by UK investors putting their money in overseas funds but reporting their profits in sterling.
Where bonds are concerned, there has been little impact so far. Rising inflation and interest rates mean prudent investors have been careful about the value of bonds in their portfolio. High yielding and emerging market bonds where returns can provide a more acceptable return for the risk taken can be preferred. Jeremy Corbyn, the leader of the Labour Party, has already agreed to honour the Brexit vote, so the markets can be sure it will still go ahead. The question will be how soft the deal might be in the hands of Corbyn, compared to Prime Minister May, who has led with a hard Brexit stance.
Where pensions are concerned, things get interesting as there is a belief that if the Conservative party wins, they could introduce a flat rate on pension’s tax relief. This would hit higher earners hard, as the rumours are that the current tax relief contribution limit of 100% of earnings to a maximum of £40,000 per year could be slashed further. Chancellor Phillip Hammond was forced to do a U-turn on his plan to increase national insurance contributions by self-employed people. Once re-elected, the Conservatives could feel more comfortable about exploring tax reforms that would be unpopular with their supporters. The ‘triple lock’ on the state pension is also on the agenda and who knows what will happen to that now.
In the hands of a good financial advisor, the impact of any political upheaval should be managed to protect your portfolio. Here at Moyes Investments, we know that kneejerk reactions to the news can unbalance investments. That’s why it’s prudent to monitor the situation and under our ‘discretionary’ offering be able to make adjustments quickly trying to protect our clients. Our offering for portfolio management is offered for Pensions contracts, Stocks and Shares ISAs & On and Off Shore investment bonds.
If you’ve got any questions about what the election and a potential win for either party would mean for your investments, do give us a call on 01638 429975.