EQUITY
June9,2017
AsequitymarketsdigesttheimplicationsofanothersurprisingUKelectionoutcome,ColinMorton,vicepresident,
portfoliomanager,FranklinUKEquityTeam,analyzestheimmediateaftermathandaskswhethertheresultcould
offersomegroundsforoptimismoverthemediumterm.
TheUKelectionresultcameasashocktomostobservers,butearlyindicationssuggestfinancialmarketsdon’t
viewitasan“endoftheworld”scenario.
Andthereareindicationsthatsomepositivescouldemergeoverthemediumterm—iftheresultleadstheUnited
KingdomtoadoptasofterapproachinitsBrexitnegotiations.
APredictableResponse
Sofar,thereactionhasbeenlargelyaswewouldhavepredictedinthisscenario.
Thepoundhasfallen,buttoputthatintoperspective,it’sstillstrongeragainsttheUSdollarthanitwaswhen
PrimeMinisterTheresaMaycalledthesnapelectioninApril.
Fromasectorpointofview,companiesseenasdefensiveandwithinternationalearningshaveflourishedinthe
immediateaftermathofthevote.
Mostofthesecompaniesthatearnasignificantamountofearningsoverseasdon’trelyontheUnitedKingdom
forearnings.Alittlebitofweaknessinthecurrencytendstohelpthem.
Ontheotherhand,UKdomestic-orientatedstocks,includinghousebuilders,generalretailstocks,realestateand
UK-focusedbanks,havesufferedinearlytrading.
InrelationtotheUKdomesticeconomy,investorsmaybeconcernedthatcompaniescouldpostponeinvestment
decisionsandconsumerscouldstopspendinguntilthereisgreaterclarityoverthewayforward.
Whetherthathappens,orwhetherpeoplewillrespondastheydidaftertheBrexitvoteandcarryonregardless,
remainstobeseen.
ReboundingUtilities
Oneslightsurprisehasbeenthereboundamongutilitystocks.
ManyutilityandenergystockshadbeenweakafterbothmajorUKpartiespledgedpotentialcapsonenergybills.
EvenoilstockswereupinearlytradingonJune9,despiteafallingoilprice,becausetheweakcurrencyhelps
dividendpaymentsinsterling.
AMoreNuancedBrexit?
OnepotentialpositivefromtheresultcouldbeamorenuancedapproachtoBrexitnegotiations.
WhenTheresaMaycalledthiselection,manyobserversvieweditasareferendumonherhard-lineBrexit
approach.Onecouldarguethatvoters’apparentrejectionofMay’sapproachshouldsignalasofterapproachto
leavingtheEuropeanUnion(EU).
TheelectionoutcomecouldmeanthatallthetoughtalkingaboutapotentialhardBrexitcouldease.
Thatmightbebeneficialforsterlingoverthelongerterm.
However,thesituationremainscomplicatedandthereremainmanyunansweredquestions.
Fromanelectionpointofview,I’veneverseenasituationwherepoliticalsentimentseemssostarklydivided
acrossthecountry.
InsomeareastherewasaswingtotheConservatives,inotherstoLabourandinScotlandtherewerehuge
swingsawayfromtheScottishNationalParty(SNP),whichwe’dreckonspellstheendoftalksofasecond
independencereferendumfornow.
YoungstersTurnout
Theoneconsistentthemeseemstohavebeenthestrongturnoutfromyoungpeople.Earlyindicationssuggesta
turnoutof72%for18-to24-year-olds.
TheironicthingisthatifyoungpeoplehadturnedouttovoteinthesenumbersfortheBrexitreferendumayear
ago,welikelywouldn’tbeinthissituationtoday.
AlltheevidencesuggestsyoungpeopleweregenerallyinfavoroftheUnitedKingdomremainingintheEU.Ifthe
“Remain”campaignhadprevailedinlastyear’sreferendumweprobablywouldn’thavehadthiselectionand
DavidCameronwouldhavebeenservingasPrimeMinsteruntil2020.
Asitstands,wewouldn’tbeatallsurprisedtoseeanotherUKgeneralelectionbeforetheendoftheyear.
Thecomments,opinionsandanalysesexpressedhereinareforinformationalpurposesonlyandshouldnotbe
consideredindividualinvestmentadviceorrecommendationstoinvestinanysecurityortoadoptanyinvestment
strategy.Becausemarketandeconomicconditionsaresubjecttorapidchange,comments,opinionsand
analysesarerenderedasofthedateofthepostingandmaychangewithoutnotice.Thematerialisnotintended
asacompleteanalysisofeverymaterialfactregardinganycountry,region,market,industry,investmentor
strategy.
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WhatAretheRisks?
Allinvestmentsinvolverisk,includingpossiblelossofprincipal.Thevalueofinvestmentscangodownaswellas
up,andinvestorsmaynotgetbackthefullamountinvested.Stockpricesfluctuate,sometimesrapidlyand
dramatically,duetofactorsaffectingindividualcompanies,particularindustriesorsectors,orgeneralmarket
conditions.Specialrisksareassociatedwithforeigninvesting,includingcurrencyfluctuations,economic
instabilityandpoliticaldevelopments.
©2017.FranklinTempletonInvestments.Allrightsreserved.