A surprising result in last week’s U.K. election, which left no party with a majority in Parliament, holds possibilities for savvy investors willing to navigate a tumultuous market.
The election “takes an uncertain situation and throws it up in the air,” says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
A few weeks ago, Prime Minister Theresa May called a general election in a move that many interpreted as a way for the ruling Conservative Party to get a bigger majority in the House of Commons and generate a stronger mandate for separating from the European Union. The strategy seemed like a good idea at the time, when opinion polls showed May and the Conservatives way ahead of their nearest rival, the Labour Party and its controversial leader Jeremy Corbyn. A bigger majority seemed assured.
But that’s not how things worked out. Instead, Conservatives lost their majority, though they still have more seats in Parliament than any other party. May, who plans to continue as prime minister, will seek an alliance with the Democratic Unionist Party in Northern Ireland, a U.K. province. Like the Conservatives, the DUP supports the push for Brexit.
Already beaten down by Brexit jitters, the British pound fell from $1.30 the day before the election to $1.27, according to Yahoo Finance data.
[Read: Currency Investing for Small Investors.]
So where do investors go from here?
Brexit is still the worry. Britain’s exit from the European Union is still to be negotiated, and if anything, the election has only added to investor anxiety about the terms of a new trade deal and how it will affect British companies.
“In the U.K. I think Brexit has real consequences,” says Nicholas Bloom, professor of economics at Stanford University. “It’s puzzling to me that the volatility for the stock market is so low.”
The problem Bloom sees is that the U.K. trades heavily with mainland Europe, and it’s unclear how or if that trade continues. That uncertainty is taking a toll on both U.K. stocks and the country’s economy.
The economy. Already, the U.K. economy looks weak. The latest reading on first-quarter growth is slow, and inflation expectations are catching the attention of investors, says Jason Lejonvarn, managing director and global investment strategist at Mellon Capital in London. Gross domestic product in the first quarter was 0.2 percent, down from 0.7 percent the previous quarter. Inflation has been rising steadily and was 2.7 percent in April compared with 1 percent last October.
Lejonvarn also notes that the country has a huge trade deficit and a fiscal deficit to boot.
Typically, countries fund trade deficits with foreign investments, but political uncertainty over the Brexit negotiation and the new alliance with the DUP could keep foreign investors away.
Without such investments, the government could cut government spending further or devalue the pound. The latter would make exports cheaper and help curb the trade deficit. Of course, the government could do both.
Either move will change the outlook for companies that do business domestically and those with multinational operations, says Jeremy Lawson, chief economist at Standard Life Investments in Edinburgh.
British companies with primarily domestic revenue (typically smaller businesses) will suffer from cutbacks in government spending, as austerity tends to crimp the domestic economy.
[Read: Should Investors Look at Europe for Bargains?]
Britain’s multinationals, such as HSBC Holdings (ticker: HSEA), BP ( BP) and British American Tobacco ( BAT), with global operations that generate tremendous non-U.K. revenue, should fare well if the pound is devalued. The cheaper pound would make their products more affordable to foreign consumers while also reducing the companies’ expenses, though most of their revenue would be denominated in foreign currencies. The result: more profits.
How to invest. The easy way to differentiate the U.K.’s international companies from those that depend primarily on the U.K. market is to compare listings for the FTSE 100 and FTSE 250 indexes. The former tracks large-cap stocks and the latter smaller companies.
American investors, though, may find an exchange-traded fund easier to invest in. The iShares MSCI United Kingdom ETF ( EWU) owns a basket of U.K.-related stocks, about 90 percent of them considered either gigantic or large cap, according to Morningstar. The fund has annual expenses of 0.48 percent, or $48 per $10,000 invested.
[See: The 10 Best European Stock ETFs on the Market.]
Don’t confuse that fund with the iShares MSCI United Kingdom Small-Cap ETF ( EWUS), which holds shares of small-cap U.K.-related stocks. Because the ticker is fairly similar, a fat finger or clumsy hand could result in buying the wrong fund. And with annual expenses of 0.59 percent, or $59 per $10,000 invested, you’d have higher costs to contend with, too.
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What Britain’s Election Means for Investors of British Companies originally appeared on usnews.com
