May was a quiet month for markets, and portfolios delivered solid gains. June has started with heightened political uncertainty in the UK, although we had reduced our exposure to UK equities ahead of the election.
May was a relatively quiet month for global financial markets, with equity prices generally edging up to new highs. The biggest market influence was the fall in political risk in Europe following the second round of the French elections, which lifted European bond and equity prices.
For the start of June, the big event of course has been the UK general election and its unexpected result.
Market reaction to UK election
Not surprisingly, sterling bore the brunt of the sudden change in UK politics at the end of last week. With a fragile minority government, and the possibility of another general election, we saw the pound fall by more than 2% against the US dollar on the Friday after the election.
The FTSE 100 – UK large companies – rose in value following the election result, by almost 1%. This was to be expected, as these companies’ foreign earnings benefitted from the lower pound, boosting the value of their stock prices.
Conversely, more domestically-focused, smaller, companies (i.e. the FTSE 250) were largely unchanged during the day.
None of these market and currency movements were surprising, given the election result.
The question now is around what happens going forward: how does this minority government govern; how does it push policies through; how does it negotiate Brexit with the EU? We expect to see a lot of volatility in the pound as these machinations flow through into markets.
Reasonable performance for Nutmeg portfolios
Looking back at May, our fully managed portfolios had a reasonable month. Our highest risk portfolios delivered returns of up to 2%, while medium risk portfolios delivered around 1% to 1.5%.
For June, to date, we’ve experienced favourable market conditions for portfolios. Generally, markets have been rising, edging up to new highs with small gains, and we’ve also seen some positive returns from bonds.
Defensive, strategic changes to portfolios
In the final run-up to the UK election, the polls narrowed and the likelihood of a hung parliament or Labour victory increased. As a result, we took measures to lessen our exposure to UK equities ahead of the election by reducing our holdings in large and mid-sized UK companies – we’re now holding less UK equities than normal – and increasing our holdings in Swiss and broader European equities.
What’s in store for markets over the coming months?
Given the heightened political uncertainty here in the UK, aside from movements in the pound, Brexit is probably the most important driver for UK financial market prices.
We think the election result moves the UK towards a softer Brexit – prioritising open trade with Europe, as opposed to closing our borders and stopping the free movement of people.
With a now-weakened government, it’s likely we’ll move closer to the EU’s line of a softer, smoother Brexit. There appears to be a growing consensus within parliament for a softer Brexit, but it’s going to be difficult to get there within the next two years. A good result for the UK would be an agreement for a transitional period that extends for several years beyond EU exit in March 2019, but of course all the remaining 27 EU states would need to agree to that.
Taking all of this into account, there’s going to be quite a different ebb and flow for the markets and the pound is going to take most of the brunt. If the pound strengthens on the view that we’re moving towards a softer Brexit, we expect to see UK equities underperform other global equity markets. As ever, in times like this it pays to hold a well-diversified, global, investment portfolio.
About this update: this update was filmed on 12 June 2017 and covers figures for the full month of May 2017 unless otherwise stated.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.