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Curiosity not conviction drives election mood

Investors have been struggling to call any winners and losers ahead of the UK election due to its lack of a binary outcome.

Curiosity not conviction drives election mood

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The countdown to the UK’s snap election has been filled with more twists and turns than many anticipated when Theresa May made the announcement seven weeks ago.

But unlike last year’s Brexit vote, or even the US presidential election, tactical bets around this vote are proving trickier for investors because they are not dealing with a binary outcome scenario.

“There is no obvious market direction you want to be looking at,” says Ben Kumar, investment manager at Seven Investment Management (7IM).  

He adds there was also no obvious mispricing in the market, with no certainty of outcome in either direction.

“Before, during and after various political events of the last year or so, half the time when you’re making the trade and following the market, it would have been the right thing to do, the other half of the time, it would have been the wrong thing to do.”

Yet the investment team at 7IM, as many of their industry peers, are likely to stay up all night watching events unfold, despite the lack of trading opportunities. 

“The only market you really can trade is sterling because of the timing,” Kumar adds, and that isn’t something he and the team are particularly worried about.

Currently, they are slightly overweight sterling on the basis the currency being undervalued in the long term.

“It’s not clear to me that one outcome means one thing or another to sterling,” he says.

“We’re much more interested in what is going on in the global economy and as much as it might pain some to admit this, it doesn’t have lot to do with Britain anymore. It’s more about the Chinese consumer and the US consumer.”  

The outcome of Thursday’s vote will also dictate the response of UK equity markets in the short term.

Jason Hollands, managing director at Tilney Group, stresses it is important to remember that “UK equities and the domestic economy are not one and the same thing.”

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