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John Chatfield-Roberts: A precarious post-election investment environment

Prime Minister Theresa May’s lost majority has significantly weakened her leadership both at home and abroad.

Jupiter Independent Funds Team head of strategy John Chatfeild-Roberts To misquote former prime minister Harold Wilson: A year is a long time in politics.

Having called a snap election in late April specifically to secure “a strong mandate for our Brexit negotiations” and with what appeared an unassailable, impregnable near 20-point lead in the opinion polls, Prime Minister Theresa May comprehensively blew it.

Far less a strong mandate, she lost her majority and in doing so significantly – perhaps fatally – weakened her leadership both at home and abroad.

The Conservatives are still the biggest party and these are early days after the political earthquake. But, at this stage, needing to rely on support from the pro-Brexit, right-of-centre Democratic Unionist Party in Northern Ireland but facing a strong opposition, it is difficult to say how Brexit will develop. Hard? Soft? Another referendum? It is all up in the air again.

Article 50 was triggered on 29 March, starting a very fixed timetable in which to negotiate our divorce from, and a new relationship with, our EU trading partners. Our EU membership lapses automatically on 29 March 2019, the second anniversary to the day of our giving notice to quit.

Formal talks with the EU have only just begun: around 90 days of that 730-day window have already passed, with nothing achieved. And now we have a weakened Government in disarray. We need a plan. The clock is ticking.

The Conservatives are in little position to play hard-ball with anyone but as Brexit negotiations progress – however smoothly or rancourously – we can be sure of a running two-year commentary from the likes of the media, politicians and economists. All will have opinions; many will have an agenda.

From an investment standpoint, currency will be the best (though not infallible) barometer of how financial markets judge progress and prospects.

A year ago, sterling hit a 2016 peak of $1.50 immediately before the first EU referendum results from the voting regions were released, such was the confidence we would vote Remain.

But following the Leave result and the Bank of England’s subsequent policy response, halving base rates to 0.25 per cent and re-introducing quantitative easing (chasing recessionary ghosts), sterling touched $1.18. The 22 per cent fall significantly benefited UK companies with international earnings or manufacturing here for export. It now stands at $1.27.

In other news…

Currencies are always on the move against each other, reflecting differential interest rates and investor confidence in each economy. The dollar has weakened against a basket of currencies recently, exacerbated in May by ongoing investigations into accusations of contact between the Russians and members of President Trump’s campaign team. More specifically, it is the allegation that Trump himself tried to suspend the FBI investigation into his former national security adviser Michael Flynn, also about connections with Russia.

Essentially, that is an accusation of attempting to pervert the course of justice. Serious stuff.

While impeachment is unlikely (the evidential bar to impeach a president is very high and Republicans, even those antipathetic to Trump, cynically know on which side their bread is buttered were it to come to a vote), it will not have won Trump any more friends or improved his negotiating position when it comes to trying to implement his nascent and thus far ill-defined economic agenda.

US equity markets, in particular, are still anticipating a greater chance of success, whether or not that is the final result, leaving the valuation of company shares potentially stretched in the near term.

Elsewhere, commodity prices, including crude oil, have recovered strongly from their precipitous falls that began in 2014, reaching their trough early in 2016. However, the momentum of that recovery is now faltering.

Demand for materials such as iron ore, steel and copper has eased as the effect of the economic stimulus put in place by China (so often in the past decade the marginal or swing consumer of such goods) wears off.

Oil remains range-bound, as it has since December, either side of $50 as global inventories remain high and the Americans continue to add more shale oil extraction capacity.

OPEC, dominated by Saudi, Iran, Mexico and Nigeria, has said it will continue at the same level of daily output agreed before Christmas. Markets had been looking for a more aggressive stance to boost prices. Still, these factors all help take some of the sting out of rising global inflation.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team


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