In the immediate aftermath of Theresa May’s announcement of a snap general election, markets moved considerably: in the world of finance, uncertainty breeds volatility.
Markets have now reconciled with the widely anticipated outcome of a landslide Tory win and the expected Brexit route. Both traditional polls and our own sentiment analysis support this prediction. The most recent polls forecast the following share of vote: Conservative 47%, Labour 29%, Liberal Democrat 9%.
There are, however, still risks on the horizon, elections being fickle things. One potential source of uncertainty is if the election “becomes a de facto second referendum”, according to Economist David Page, with the Liberal Democrats being the only credible party for remainers to vote for.
Our social media sentiment analysis shows that over 50% of conversations discussing Labour’s potential losses, or people indicating intent not to vote for them, are happening in their supposed heartlands of London (30%), the North West (12%), Yorkshire and Humber (9%). Conversations about potential wins and intent to vote for the Liberal Democrats are correspondingly high in London and the North West (12%), suggesting a shift from Labour to Lib Dem votes. Such indicators that the Tories might “struggle to increase their majority and hence shift the envisioned path of Brexit could have an adverse impact on markets over the coming weeks”.
What does this mean for the world of Private Equity?
After a historically quiet first quarter, with both acquisitions and exits down by approximately 45% compared to last quarter, firms are looking at riskier products and the uncertainty tainting UK markets is forcing them to look further afield, to Europe and beyond, to find deals. This leaves deals exposed to foreign exchange risk. The local elections gave a preview of how the pound will react to a Conservative win. Sterling soared after Theresa May announced the general election (with the FTSE 100 consequently having its worst day since the Brexit vote); similarly, Conservative wins in the local elections saw the pound rally against the US dollar, rising to $1.30 USD per GBP. A ‘blue Britain’ will have been priced into the FX markets; however, a lower-than-expected Conservative majority could cause further volatility, leaving any PE firms who have not hedged their exposure out in the cold.
So what should we expect? What this wider context and recent experience has shown is that whilst trading is affected, equity investment needn’t be. We should continue to drive the markets. Investing abroad is a good stop gap, though it puts cautious investors at risk of missing out. Whatever the outcome (except, maybe, a shock Labour win and the dramatic policy changes it would bring), markets will soon re-stabilise. As Kerim Derhalli, CEO of FinTech app Investr, recently said in response to the General Election: “In this strange dystopian present, the one constant has been inconsistency, and many firms, big and small, in the finance world have learned to expect the unexpected.” What is unclear is whether markets will adjust to this new political environment, or investors will seek sanctuary overseas. It might be that the regularity of international turmoil – Trump, Brexit, Scottish independence – has an insulating effect. As Kerim Derhalli, Oscar Wilde and Douglas Adams have all told us, “expect the unexpected”: and don’t panic.