For Prime Minister Theresa May, the outcome of the general election was the last thing she had hoped for. The reality is her standing has been significantly weakened, perhaps fatally so. But already the focus of attention is beginning to shift away from electoral navel-gazing to those all-important Brexit negotiations. Whereas we went into the election faced with the hard ‘no deal is better than a bad deal’ style Brexit, Mrs May’s proposed bedfellows, the Democratic Union Party, are known to favour a soft Brexit. This may not be a bad thing for the UK economy, or UK economic growth. The resilience in the current level of sterling against the US dollar, and the FTSE 250 index would certainly appear to be reinforcing this view.
For now, what is clear to investors is that the performance of the UK economy has remained far more resilient to recent political uncertainty, following the vote to leave the European Union, than many feared. With a continuation of a Conservative-led government, we do not expect any major policy changes. With the possible caveat that the strength of the youth vote against anti-austerity measures means we may see government policies aimed at fiscal easing in the not-too-distant future. It is clear that Jeremy Corbyn’s anti-austerity manifesto has resonated very strongly with parts of the electorate.
While political developments continue to dominate media headlines for some time to come, we expect the main effects to be felt in currency markets, with sterling range-bound for the foreseeable future. For the UK economy as a whole, however, it feels as though it’s business as usual. This being the case, UK domestic cyclicals – those companies, such as housebuilders and challenger banks – whose fortunes are tied into the UK economy, should prove to be resilient if the UK economy performs as we expect.
As regards our strategy, we are not particularly exposed to UK domestic cyclical stocks. We are broadly neutrally positioned relative to the benchmark index in housebuilders, only moderately overweight property stocks and have little exposure to traditional retailers, or pub and restaurant companies. We are well exposed to structural growth stocks (companies which continue to grow profits irrespective of any economic sensitivity) through positions in boohoo.com, Paysafe, Ascential, Fever-Tree and Purplebricks. In addition to the aforesaid stocks, other overseas earners to which we have exposure include Micro Focus International, Ashtead, Melrose Industries, 3i and Rentokil.
In summary, despite the recent political machinations, we see no reason to change our strategy positioning, especially in light of the diversified geographic spread of our underlying holdings. With the earnings growth from the companies we hold comfortably outweighing that of the average growth prospects for companies within the FTSE 250 index, as a whole, our optimism remains intact.