Stable markets can get back to basics as election uncertainty over at last
What a week to start a column on the investment markets. It is traditionally held that businesses and markets like predictability and certainty. Markets like to look ahead and price in probable future events. It was feared that this week investors would be facing into strong headwinds as political uncertainty buffeted UK investment markets.
But most commentators got it wrong and have been surprised by the clear mandate for the Conservative Party at Westminster. Irrespective of party political views, the markets can now look to a more stable political and economic environment at a national level. However, national party political stability will have to cope with the stark position in Scotland and the emerging EU referendum question.
The initial market reaction has seen a strong surge in the UK stock market mirrored by a strengthening of sterling. And now that the uncertainty of the election is out of the way, we can expect markets to refocus on fundamentals in the UK, including the outlook for corporate profits and dividends and future interest rates. Relief at the probability of a more stable political environment will soon disappear and be taken for granted.
In the short-term, some commentators believe that UK growth will recover from the weak figures in quarter one, on the basis of increasing employment and the re-emergence of real wage growth, the first since 2009. This should be supported by demand for UK goods in recovering European markets.
For speculators, the prospect of stability has reduced some short-term trading opportunities, though some analysts are suggesting volatility for the GBP could be in store in the short-term as traders unwind positions taken based on the opinion polls. Bank and energy company shares should emerge from the shadow of Labour intervention.
For long-term investors the fundamentals of investing in good quality companies with a consistent dividend record remain, but now without the overlay and added complexity of extreme political uncertainty.
Jeremy Stewart is head of wealth management and private banking at Danske Bank.