Hung like a British Parliament
By Mike Narouei, Content Producer at Boring Money
9 June, 2017
2016 and 2017 will be singled out in Economics classes for decades to come as the years when financial markets’ ability to accurately predict and price political outcomes crashed and burned. As Blackadder might say, the British Parliament is hung like a baboon… and the markets didn’t anticipate that. So what to do?
It’s more uncertainty at a time when international investors would like clarity and a clear path ahead, just 10 days before the Brexit fisticuffs start in earnest. The impact this morning has been a pummelled pound and schizophrenic stock markets at home – with the big internationally-focussed FTSE 100 players rising and the smaller, more domestically focussed FTSE 250 brigade heading marginally South.
Britain looks fragile to foreign eyes and so there’s less appetite to invest and do business here. Which means fewer people need pounds. And so sterling falls on the back of weaker demand for it.
At time of writing a pound translates into €1.14. Five years ago, a pound got us €1.26. Twenty years ago it bought €1.43. To yank this out of high-falutin’ economic speak and put it into the sphere of our realities, a €200 a night hotel costs us nearly £40 a night more than it did 20 years ago.
Schizophrenic British markets
As political daggers are drawn and deals done, the UK market looks less appealing for global investors. In the big board game of financial Risk, suddenly the UK looks a bit messy and money can be more safely deployed elsewhere.
Our biggest companies in the FTSE 100 are more influenced by Shanghai than Sheffield, and make significant revenues internationally. In this case, when they bring the money back to Blighty to tot up their profits, a weaker pound inflates their results. Which is why the FTSE 100 is up a little today mid-morning.
Conversely the FTSE 250 lot tend to focus domestically and this bunch of companies is slightly down (although it’s far from a panicked response). As well as election shenanigans, the UK economy is also showing signs of slowing down – house prices and consumer spending have been weaker whilst UK economic growth has been downgraded. Then there is Brexit – foreign investors may find the UK cheap but with Brexit negotiations looming many investors may choose to wait. It’s hard to see a period of stable growth ahead for the FTSE 250 over the short-term.
What to do?
At times like this people tend to ask what they should do? My general response is that by the time we’ve woken up, had a coffee and read the papers, professional traders have already been all over the markets and made the moves. The news is priced in. If 2016 and 2017 has shown us anything, it’s that trying to predict the future and position a portfolio correspondingly is futile for us humble mortals. And actually, even for the Wolves of Wall Street. So we just diversify our investments, spread the risk around and then leave them alone and resist the urge to fiddle. I’m not trading today.
As a final note, I always find it interesting to look at the odds on gambling sites at times like these. Money tends not to lie and can be more reliable than academics and experts. This morning, William Hill had 4/1 odds that Boris Johnson will be PM by this time next week, although they are lengthening fast. Blimey. One can only imagine what the Blackadder script writers would make of British politics today.