On Monday the UK will know who will be the new Prime Minister. But for investors, there is a more important factor to consider, says Chris Metcalfe, IBOSS Chief Investment Officer.
The change of Prime Minister, we feel, will have a limited overall impact on the UK investing landscape, at least that which is observable.
Despite the widespread and near constant stream of doom and gloom proffered by multiple media outlets and financial commentators alike, regardless of who wins the leadership election, it’s about looking through the headlines and staying focused on the fundamentals, at least from an investment standpoint.
It is our view that, unlike when Jeremy Corbyn was the opposition leader, this handover does not have the same potential for disruption even if there was a change of political party in government.
That said, an early view on the candidates is that Truss will be more of a populist kind of leader if her indications about tax and her approach to the rapidly increasing energy bills are to be believed. Her emphasis seems to be on supposedly quick fixes. On the other hand, Sunak appears to be more cautious in nature, focusing on maintaining fiscal discipline and tackling longer-term issues such as reconfiguring the supply chains in this era of retreating globalisation.
With rates rising, predictions of inflation peaking at anywhere between 13% and 23% and an economy expected to enter recession in the fourth quarter, sentiment towards the UK is already so low (as it has been since the Brexit vote). We don’t see this changing regardless of who takes the hot seat at number ten.
However, it’s important to remember that as investors, we do not invest in the economy; we invest in the stock market. Within the FTSE 100, the prospects for big oil, miners and bank companies have been the strongest for as long as I can remember.
The most significant impact for UK investors, whether it is from a change in Prime Minister or Brexit, is through the currency. Whilst the weaker pound gets a lot of coverage, it is essential to understand why and against what. For UK investors, the weakening pound has often cushioned equity market losses; the current period is an excellent example. It also must be remembered that the FTSE 100 is one of the most genuinely global indices, and not all companies want the currency to move in the same direction.
One final point, in general terms, is that the UK has been an underperformer for many years. Still, on a relative basis, the UK should do well in a globally inflationary environment, and this factor is far more important to investors than a change in PM.
