UK equities up for review on back of soft Brexit hints

UK equities up for review on back of soft Brexit hints

The prospect of the UK agreeing a softer Brexit deal has caused investors to reconsider certain parts of the UK market, after Theresa May failed to secure a majority in last week’s general election.

The prime minister’s failure to win an outright majority, with an initial tally of 318 MPs leaving her party eight seats short, caught many observers off guard given expectations of Conservative advances.

However, commentators believe the result could ease potential stresses on the economy by lessening the chances of a hard Brexit, in which the UK gives up membership of the single market. 

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Northern Ireland’s DUP, expected to provide support to the Conservatives, have said they favour a flexible Irish border – a policy that implies a softer Brexit deal. The Scottish Conservatives, who also now hold a balance of power, are also in favour of a less extreme deal.

“The result may augur a more realistic and pragmatic approach,” said Neil Dwane, a global strategist at Allianz Global Investors. “Any deal will now have to be ratified by parliament, rather than simply waved through on a Conservative majority.”

Mark Burgess, global head of equities at Columbia Threadneedle, added: “The election result has reduced the likelihood of a hard Brexit, which is economically positive for the UK and Europe.”

A potential opportunity for investors comes as a result of the disconnect between the vote’s short and medium-term consequences. James Ross, European equity fund manager at Janus Henderson, said two conflicting considerations may now drive the UK equity market.

“First, the perception that we will be entering a more uncertain political environment [that is] negative for domestic equities and sterling, and second, that the government’s Brexit stance may be somewhat softened...potentially positive for domestic equities and sterling in the longer term.”

As the election results emerged, a subdued day of market moves suggested investors viewed the outcome favourably, or had at least priced in a worst case scenario. By contrast to the volatility that followed last year’s EU referendum result, last Friday morning saw sterling drop around 1.5 per cent versus the dollar. That pushed up the FTSE 100, but the domestic-focused FTSE 250 also ended the day higher.

“The response has been relatively muted, possibly reflecting the lack of high conviction positioning running into the election,” said Chris Bates, an investment strategist at Smith & Williamson.

Ritu Vohora, equities investment director at M&G, noted that “selective buying opportunities” had emerged for managers given dips for sectors such as housebuilders and banks. 

Investec’s Alastair Mundy added: “We would expect to be adding further in the area of domestically-exposed UK equities area if we see further share price falls.”

But political uncertainty remains the watchword for many. 

“History shows us that UK minority governments don’t last very long,” said Mr Bates. “There’s a very strong prospect we will see a replay of 1974 and another election within 12 months.”