THE prospect of a “softer” Brexit following the shock General Election result could provide some reassurance to the financial markets, it was claimed today.
Prime Minister Theresa May is likely to have to tone down her negotiating stance with Brussels to appease “Remainers” within her party after yesterday’s vote left the country with a hung parliament.
Simon Gibson, Chief Investment Officer for Mattioli Woods plc, said the outcome of the ballot had created “inherent uncertainty” just days before the talks were due to begin.
But he added: “The result does pose the intriguing possibility of a ‘softer’ Brexit. This may well provide reassurance to the markets, prevent a much more serious fall in currency (the pound has fallen around two per cent against the dollar and the Euro) and potentially make UK assets more attractive to investors.
“It is already possible to detect a more measured tone on Brexit from some Conservatives and the prospect of remaining in the single market could entice some investors back to UK assets”.
Mr Gibson said the equity market would inevitably re-rate some domestically focused companies on grounds of political stability and, if not for the ongoing issue of Brexit, it would be “reckless to pretend that a hung parliament was a remotely market-friendly outcome, perhaps especially in the medium term”.
Mattioli Woods, he said, had gone into the election cautious both on the UK and markets in general.
“I think this leaves us well placed to weather such developments. Concerns over Brexit and the UK economy meant that we have been underweight UK equities for some time,” he explained.
“Although we have a conceptual preference for small cap names even these, in common with their large cap peers, derive substantial portions of their revenues from overseas and so sterling weakness can even be helpful.
“Though the direction of sterling is difficult to be sure of, such developments demonstrate the importance of whether we should ‘hedge’ foreign currency exposure in portfolios, again something which we analyse on an ongoing basis”.
Mr Gibson stressed: “Agility is going to be important here, as anything which affects the tone of Brexit negotiations and the trajectory of sterling will be of relevance to how investors approach the UK.
“This sort of political development is yet another reminder of the importance of diversification and of exercising caution in markets where so many investors have become blasé in their approach to risk. Our new perspective on asset allocation looks really helpful right now”.