May week was in June

James Horniman, Portfolio Manager

“May Week was in June” was the title Clive James gave to his memoir of life at Cambridge University. This sprang to mind as MPs voted to support Theresa May’s surprise decision to call a general election.

This election may be in June but it is all about May – about her winning a democratic mandate to implement Brexit her way, strengthening her majority by taking advantage of the ailing popularity of the opposition.

She can kill two birds with one stone here – give Labour a good kicking while it is fragile and undermine critics in her own party, whose power to influence affairs is diminished the greater her majority.

A stronger majority, the argument goes, should also strengthen her hand in the crucial Brexit negotiations. There may well be some truth in that and the response of sterling in the immediate aftermath – it strengthened by 2.7 per cent against the dollar on the day of the announcement ­– indicates that the markets believe this to be the case.

The next General Election was originally scheduled for 2019 – soon after the planned completion of Brexit negotiations. If she had waited till then, May could have found herself in a weaker bargaining position. So there is a great deal of logic in going now.

What do we think the election means for investments? If sterling holds or strengthens its position, this will help dampen inflation, which recently breached the 2% Bank of England target. It will help exporters and inflation-sensitive areas of the market.

But does it change much? Our view when Article 50 was triggered was that politics has much less impact on markets over the long term than people might assume in the heat of the 24-hour rolling news drama of events.

One national paper sent a news alert out on the day of the announcement with the headline: “How £46bn was wiped off the FTSE 100 in worst day since Brexit vote”. The markets fell 2.46% in the course of the day. Markets do that. They don’t like surprises, but they typically get over them surprisingly quickly.

Many long-term investors might view this as an opportunity to drip some more money into the markets. We wouldn’t necessarily disagree, but we do think markets are looking pretty fully priced in general. In the world of private client investment management, where the objectives are usually long term ones, it seldom pays to be rash. A cautious and progressive approach is usually recommended.

This is a time for being picky – looking for fair-value stocks that are dependable, with competitive advantage and global reach. We remain neutral on equities and cautiously alert.

As we learned this week, the world can deliver surprises. We never know what other surprises are around the corner, some of them perhaps nasty.

You might think you could bet your house on a May victory; you might agree with us that politics has little long-term impact on investment returns, but the wise investor will have a diversified, balanced portfolio with some protection just in case.

James Horniman

Published 20 April 2017

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