The famous (or infamous) cliché ‘Buy the rumour, sell the fact’ is commonly used in the financial markets. But it contains a significant element of truth.
It has been seen in the performance of the pound versus the dollar and euro since Boris Johnson ascended to the premiership. Having suffered heavily for most of 2019, sterling rallied sharply, as markets backed the blonde bombshell in his quest to ‘get Brexit done’. The ascent is all the more remarkable for the fact it took place against a background of parliamentary warfare, and legal challenges to his authority. But with investors so convinced of his electoral success, is the move in sterling done?
Anyone expecting a further rally in sterling if he wins the election may well be disappointed. The news is already ‘in the price’, unless the polls have dramatically underestimated the depth of support for the Conservatives. Instead, some of the ‘Boris bounce’ might get eroded as investors look to the next problem, stage two of negotiations with the EU. This has the potential to act as a catalyst for negative sentiment and if nothing else could lead to a significant slowdown of flows into UK assets.
The FTSE 100 has found itself constrained by the performance of sterling too. Whereas other markets have enjoyed excellent gains, the UK’s headline index has found itself lagging far behind. While indices such as the S&P 500 are bolstered by trade war headlines, the impact on the FTSE is muted – the gap has widened over the summer, with the FTSE 100 unable to break through the 7450 zone that has marked resistance for months now.
On a more positive note, the index has also managed to hold above 7000. The popular perception of the FTSE 100 as a ‘UK index’ is fundamentally flawed, since it contains few companies whose sole area of operation is the UK. Indeed, it has a hefty slice of firms that actually do not really operate in the UK at all, or only minimally. The slow turn higher in some global PMIs, and still-loose monetary policy, bodes well for the global economy, which could see these international stocks play catch-up. A weakening of the pound in the aftermath of the election, as outlined above would also help this move gain traction.
But better news, or less bad news, is not enough. What is needed is investor confidence that the UK can negotiate successfully with the EU and begin to strike out on its own in the world. For months, UK assets have been among the least popular in regular surveys of fund managers. This lack of flow has been a key reason why the UK has underperformed – international money managers look at the political crises that beset the UK and have decided to put their money elsewhere. In a world of huge opportunities in many different areas, we should not assume that these flows will come rushing back if Boris wins the election, but a steady inflow would help UK assets generally to close some of the outperformance gap.
Heading into the election itself, we have seen the pound stabilise, while the FTSE 100 has rallied back above 7200 on better US jobs news. Weekend polling puts the Conservatives on an average lead of ten points, still pointing to a majority for the party. As a result, the surprise will be either a hung parliament again, or a Labour win, neither of which is likely to be sterling positive.