The Pure Gold Company
Joshua Saul of The Pure Gold Company describes the effects of the hung parliament on investor confidence following the General Election in an article from Yourmoney.com, and the attractiveness of gold investment as a result.
By Paloma Kubiak
The shock result of the General Election has called into question the Conservative’s ‘strong and stable’ leadership as the UK negotiates the terms of its Brexit deal. Having secured 318 seats so far (just one more constituency needs to declare its result), it falls short of the 326 required for them to win a majority-led parliament. Labour secured 261 seats.
As such the prospect of a hung parliament looms, creating greater uncertainty for the UK electorate. But early discussions point to the Conservatives attempting to form a government with the help of Northern Ireland’s Democratic Unionist Party (DUP) which secured 10 seats.
As further negotiations take place, below we explain the impact of a hung parliament on pension savers, investors and holidaymakers.
The stock market
As with Brexit and the election of president Donald Trump, the General Election result wasn’t priced in to the markets. With the prospect of a coalition government for the second time in three General Elections, the unexpected result away from the security of a majority Conservative government has added greater uncertainty to the markets.
Tom Stevenson, investment director for personal investing at Fidelity International, says the unwelcome outcome is likely to hit UK shares and bonds.
“Markets will likely remain on the back foot while the difficult job of putting together a workable government is undertaken. A weak pound has provided a boost to the UK equity market over the past year but that was against a backdrop of a more robust economy than anyone expected after the Brexit vote.
“Looking ahead, the FTSE 100 will struggle to progress even with the tailwind of weak sterling’s boost to exporters and overseas earners. Domestically-focused companies in the FTSE 250 and Small Cap indices also face headwinds as sluggish domestic earnings and rising inflation deliver an effective pay-cut to British workers. We continue to prefer European equities to the UK market.”
Paul Flood, a multi-asset portfolio manager at Newton Investment Management, adds: “Currency weakness may lead to higher inflation in the UK, which is supportive of assets with inflation-linked revenue streams such as renewable energy assets to outperform government bonds, which are likely to come under pressure as lower economic growth leads to higher government borrowing against more inflationary pressures from a weaker currency.”
Investors are reminded not to panic and make rash decisions in light of short-term market noise. Mark Dampier, head of investment research at Hargreaves Lansdown, says: “I see no need to make any rash investment decisions, given the range of possible outcomes over the next few weeks. Investors should sit tight or even buy if the opportunity arises.
“Overseas investment is unaltered by the election apart from changes to sterling which should act positively as we have seen over the last 12 months. That said remember a softer Brexit could see sterling recover.
“We have always advocated a level-headed, long-term approach to investing, and I would urge investors to resist the temptation to make short-term, knee-jerk reactions. We could see some volatility over the coming days as more details emerge about the new government.”
Dampier adds that once a government is in place, he expects the “dust to settle fairly quickly” and given the international nature of the UK market, the reality is that the election result matters little for many UK-listed companies.
In light of the snap General Election call back in April, a number of pension rule changes were shelved, meaning pension savers were left in limbo.
And a hung parliament is the worst possible outcome for pensioners and people saving for their retirement according to Tom Selby, senior analyst at AJ Bell.
He says: “Key decisions around the state retirement age, the state pension triple lock, social care funding and pension tax relief are all going to take a back seat while the wheels of Westminster slowly turn.
“Theresa May’s decision to call a snap election also derailed a number of key personal finance policies which were previously in train but got omitted from the Finance Bill. This includes proposals to reduce the Dividend Allowance from £5,000 to £2,000 and a cut to the Money Purchase Annual Allowance from £10,000 to £4,000.
“The MPAA reduction is particularly problematic because the government said it would apply from 6 April 2017 but never actually put this into law. We therefore need urgent clarity on whether this will be applied retrospectively – this would be particularly harsh given many savers will have had no idea the new allowance had been announced. It would seem sensible to delay the cut until 2018, or at the very least allow anyone facing a tax charge to get a refund of their contributions.”
Tom McPhail, head of policy at Hargreaves Lansdown, says they expect to see the auto-enrolment review run its course. “This election result strengthens the likelihood we will now see some of the more inclusive changes such as bringing lower earners and the self-employed into the system,” he says.
According to The Pure Gold Company, panic-stricken investors hedging their bets in favour of a hung parliament turned to the precious metal as it saw an 87% increase in purchases over a 24-hour period.
Josh Saul, chief executive of The Pure Gold Company, says: “We’ve also seen a 63% increase in people removing exposure to equities within their pension in order to purchase physical gold in the same vehicle. Brexit worried people last year and the prospect of a hung parliament is perceived to weaken our position on trade agreements. Our clients feel that this could considerably affect our economy and it’s this that is driving them to hedge their wealth, including their retirement, with a risk adverse asset class such as physical gold.”
Currency and impact on holidaymakers
The pound has fallen an average of 2% against 158 global currencies as the General Election results came through, according to currency expert FairFX.
In just 24 hours, the pound fell by 2% against the euro from 1.153 to 1.134, and 2% against the US dollar from 1.293 to 1.271. In real terms, this means you will get €19 less or $23 less for every £1,000 exchanged – worth £17 and £18 respectively.
FairFX says the pound is now at its lowest rate against the euro in nearly 21 weeks, since 15 January, when it was a fraction lower at 1.1340 (compared with 1.1341 today). Prior to this, the pound-euro rate hasn’t been this low since November. The pound has also hit its lowest rate against the dollar in nearly eight weeks, since 17 April, when it was 1.256.
Taking into context the value of the pound since last June’s Brexit result, sterling is now 13% lower against the euro and 14% against the dollar – giving you €167 and $209 less for every £1,000 exchanged, equivalent to £148 and £164 respectively.
Today’s pound-euro rate is still 2% better than it was when it hit its historic low of 1.107 in November 2016, giving you €27 – equivalent to £24 – more for every £1,000. And the pound-dollar rate today is 6% better than January when it hit its 31-year historic low of 1.202, giving you $69 – equivalent to £54 – more for every £1,000 exchanged.
Ian Strafford-Taylor, CEO of FairFX, said: “Uncertainty driven by Brexit and, more recently, the run up to the general election, resulted in volatility in the strength of the pound which has experienced a roller coaster 12 months. Unfortunately, uncertainty is likely to characterise the coming days, weeks and months as a government is formed and Brexit negotiations start in earnest which could lead to further currency volatility.”
Strafford-Taylor says consumers looking to buy currency can still find good value by planning ahead. He says: “If you’re not set on where you travel, look at destinations where the pound goes furthest over the long-term which will help you get more bang for your buck.
“When you’ve booked your holiday, keeping an eye on rates is a smart move so you can buy when the pound is at its strongest. The key is to never leave travel money until the last minute as you risk being at the mercy of the rate on the day and are more likely to miss out on the best deals.”