The shock result of the UK election is now behind us, but uncertainty looks set to continue, with all eyes on the progress of Brexit negotiations and the impact on sterling and the stock market. Against this challenging backdrop, it is crucial that investors look past the short-term volatility.
It is worth bearing in mind that the initial market reaction to shock events, laden with emotion and uncertainty, is often inefficient and does not set the future trend. Investors may recall that in the immediate aftermath of the Brexit vote the market sold off aggressively, before rallying strongly to new highs. The initial market reaction following the general election result may not be indicative of the future.
Three important factors to consider are: does the result lead to a sustained fall in sterling; what is the impact on the UK economy; and is the global economy strong enough to support the broader index?
The data suggests the answer to the latter question is yes. However, the answers to the other two questions are difficult to know, and will largely depend on how Brexit negotiations go. If we have a relatively soft Brexit, sterling will rally and the economy will likely perform well, which will help domestic earnings. If we have a hard Brexit then sterling may fall further and the economy will be under strain. The latter is not necessarily negative for the UK equity market as it is an internationally exposed index, particularly in the large cap space.
What is certain, among all this uncertainty, is that the journey has not ended by a long shot. Markets are now likely to shift their focus to the Brexit negotiations, but this election result seems to have created yet more distractions.
Against this backdrop, it remains more important than ever for investors to stay invested and to focus on the fundamentals driving companies rather than the short-term market uncertainty.
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