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UK election: Mind the sterling exchange rate
20/04/2017 , Ian Orton

One prediction that can be confidently made about the decision of Theresa May, the UK’s Prime Minister, to hold a snap General Election on 8 June is that the noise level will rise considerably over the next six weeks.

Just about every analyst and commentator will feel duty bound to publish notes and commentary on a daily basis about the impact of the election on the UK economy and asset prices. No doubt email inboxes are already groaning from the weight of commentary already delivered.

Most will be of no relevance whatsoever. The fact is that governments in the developed world have only a marginal impact on the long-term trend rate of growth in an economy, especially relative to fundamentals like demographics and productivity growth. So whatever the outcome economic life will probably continue much as before.

Governments may have more influence on asset price behaviour, especially in the short term, not least because of their tax policies. Even here, however, the effect is not especially significant. UK equity returns have tended to generate the same level of returns irrespective of which political party forms a government.

Nonetheless, the outcome of the 2017 General Election could have greater significance for investors than is normally the case especially if, as is currently expected, the incumbent government increases its majority.

Indeed markets have already hinted what that effect could be. As soon as Mrs May announced the date of the election sterling strengthened significantly. And the benchmark FTSE 100 index experienced its worst day of the year, falling by nearly 2.5 percent.

UK investors have experienced boom conditions since the Brexit Referendum of 23 June 2016 largely as a consequence of the steep fall experienced by sterling in the interim.

A note published by Stifel points out that gains arising from sterling’s weakness helped underpin the 20 percent to 40 percent net asset value (NAV) returns delivered by UK-listed investment trusts that invest on a global basis.

Take RIT Capital for example, the investment trust in which Lord Rothschild and his family hold a significant shareholding. According to Stifel currency gains accounted for 9.6 percent of the 12.1 percent NAV increase recorded for 2016.

Sterling weakness is good news for UK investors that hold portfolios with significant international exposure. The value of  foreign assets held increases in sterling terms.

But when sterling strengthens the reverse holds true. Should sterling strengthen further  many of the equity gains garnered as a consequence of its post 23 June depreciation may evaporate. 

Should Mrs May increase her majority on 8 May the expectation is that sterling will increase in value relative to other currencies. A bigger majority should, in theory at least, stregthen Mrs May's hand through the forthcoming Brexit negotiations.

If this ensues then it could pay to hold a much greater proportion of assets that have explicit exposure to the UK, rather than the rest of the world.

For investors that favour investment trusts the Stiffel note helpfully lists the UK exposure of London-listed global and global equity income funds (see below).

Investors wishing to play the currency card, however, could also switch into funds that focus explicitly on the UK rather than international markets.

Top five Global and Global Equity Income Funds in terms of UK exposure (mcap> £150m)

Fund % of portfolio
Independent Investment Trust 94.0
Lindsell Train 73.9
Majedie 72.7
Law Debenture Corporation 70.4
Caledonia 40.4

Source: Stifel 

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