Private investors are being warned to brace themselves for volatility as markets reacted to the general election result, which has increased uncertainty over Brexit negotiations and thrown party manifesto pledges into question. So what could it all mean for your personal finances?
Investment experts urged private investors not to panic as UK markets opened, with many fund managers anticipating buying opportunities amid the uncertainty.
Stock markets were driven by currency movements in early trading, with a decline in sterling boosting the share prices of the UK’s largest companies.
“The pound is going to be the barometer for the UK market,” said Maike Currie, investment director at asset manager Fidelity International. “A weak pound is good for international earners.”
The FTSE 100 index — dominated by companies with overseas earnings — rose by 1.3 per cent on Friday. The FTSE 250 — which is made up of smaller, more domestically focused companies — fell by 0.6 per cent.
Housebuilders and banks were among the largest fallers, and sectors like mining with high international earnings were among the biggest risers.
Fund managers drew comparisons with market reaction in the wake of the Brexit vote last June.
“It was a Brexit-type basket of trades first thing this morning,” said Eric Moore, UK equity income fund manager at Miton. “Domestic stocks are getting whacked.”
Retail brokers said trading volumes were slightly higher than normal, but that retail investors were not reacting as strongly to the election result as they did to Brexit, with experts suggesting that uncertainty was holding people back.
“We still don’t quite know what [the election result] means,” said Mr Moore.
Other fund managers warned that international confidence in the UK might take a further hit. Tom Becket, chief investment officer at Psigma Investment Management, warned investors not to be “too parochial in their investment approach”.
“I still think investors would do well to find parts of the world that are cheap,” said Mr Becket. “For me Japanese equities are up there, and we still like emerging market equities.”
Mr Moore of Miton agreed: “If I was a global investor I would be looking at the UK and thinking — I could just ignore that and come back later.”
Richard Buxton, head of UK equities at Old Mutual Global Investors, was more optimistic: “Although a period of uncertainty will not be welcomed by the market, any further signs of a ‘softer’ Brexit, combined with the tailwind of still-improving global demand, could bode surprisingly well for UK companies.”
A “softer” Brexit might also boost financial services stocks and banks, added Russ Mould, investment director at AJ Bell.
Meanwhile, with so much uncertainty in the market, retail investors were warned not to panic. Mark Dampier, head of investment research at Hargreaves Lansdown, said investors should “resist the temptation to make short-term, knee-jerk reactions” given the range of possible outcomes over the next few weeks.
“In our view investors should continue to pursue their long-term strategy,” he said, advising that they should “sit tight or even buy if the opportunity arises”.
The pound fell by about 2 per cent following Thursday night’s exit polls, but traders said hopes of a “soft Brexit” had prevented it from falling further as the election result became clear.
Nevertheless, the cost of a holiday abroad has risen for British families.
With sterling now at its lowest rate against the euro in 21 weeks, currency specialist FairFX said travellers would get €19 less or $23 less for every £1,000 exchanged — worth £17 and £18 respectively.
With the Conservative party expected to form a minority government with the backing of Northern Ireland’s Democratic Unionist Party (DUP), future policy implications remain mired in uncertainty.
A surge of interest in DUP manifesto pledges caused the party’s website to crash on Friday morning. It supported moves to raise the personal allowance to £12,500. But the prospects for an increase in the higher rate threshold to £50,000 — also promised by the Conservatives — are less clear, not least because Northern Ireland has a relatively small number of higher rate taxpayers.
The hung parliament is expected to have a damping effect on tax policy, as controversial measures that might be difficult to get through parliament are given less priority.
Arabella Murphy, head of private wealth at Maurice Turnor Gardner, the law firm, said: “For privately wealthy families, trusts and family businesses, this may lead to a period of relative stability without significant reforms, if changes cannot easily be agreed.”
Yet the hung parliament might end up tilting policy towards higher taxes on the wealthy, say some analysts. Tom McPhail, head of policy at Hargreaves Lansdown, said: “It is clear that the policy centre of gravity has shifted in favour of the Labour position.”
The election result also added to uncertainty over whether all the tax changes already in the pipeline would remain on track. The snap election delayed the progress of the finance bill, which was radically slimmed down — dropping measures ranging from the dividend tax rise to a digital tax break for Airbnb users — to enable it to pass before parliament was dissolved.
Bill Dodwell, head of tax policy at professional services group Deloitte, said he expected all the measures to be reintroduced as planned. But he hoped the “making tax digital” initiative — requiring businesses and self-employed workers to keep digital records — would have a soft launch in 2018, to take account of delays from the election.
George Bull, senior tax partner of accountancy firm RSM, said: “The opposition to the new government will have more influence than in the past. Fought-over areas at the margins of the tax code will see the government having to give way more frequently.”
Pensions and retirement
Radical changes to pensions policy and funding the cost of caring for the elderly are likely to be “kicked into the long grass” following the election outcome, according to experts.
“A minority government will struggle to pass any major reforming legislation which creates gainers and losers,” said Sir Steve Webb, former pensions minister and director of policy with Royal London, the insurer.
“Reforming the funding of social care will almost certainly be kicked into the long grass, as will any big shake-up of pension tax relief.”
Conservative plans to water down the state pension “triple lock” in 2020 could be abandoned, as the DUP — which the Tories are relying on for support — made a manifesto pledge to keep it. The triple lock sees the state pension rise by the higher of average earnings, prices or 2.5 per cent.
The DUP has also pledged to continue its “staunch support” for pensioners in the new parliament, which could impede Conservative plans to means-test winter fuel payments, currently worth up to £300 a year.
The Tories may also come under pressure to ease their position on compensation for 1950s-born women who say they were unfairly impacted by faster-than-expected increases to their state pension age. The government has resisted calls to compensate women affected, but the DUP supports an end to the “unfair treatment” of women pensioners.
Experts said the political uncertainty meant a faster schedule for state pension age rises — which had been under government consideration before the election — was less likely.
“The new government will also shortly need to make up its mind about future changes to the state pension age. The loss of a majority in the Commons means that the more aggressive increases which the Treasury would have preferred are now probably off the table,” added Sir Steve.
Housing market experts said they anticipated the recent low level of transactions to persist as questions rumble on over the future leadership and tenor of the government as well as the outlook for the economy, discouraging buyers and sellers from moving.
Richard Donnell, director at housing market analyst Hometrack, said the uncertainty of the general election had now been supplanted by the uncertainty of future Brexit negotiations in the minds of buyers and sellers.
“People might wait till after the summer [to transact],” he said. “If you think of the cycle of the buying season, they might now put it off till September.”
Yet the upside of a shrinking market could be to provide a cushioning effect on price falls, said Anthony Codling, analyst at Jefferies. “Further tightening in secondhand stock levels would, in our view, underpin prices reducing the risk of significant house price falls.”
Future housing policy may also be affected by the departure of housing minister Gavin Barwell, who lost his Croydon Central seat in the election. Mr Barwell was instrumental in fashioning the housing white paper published in February, in which the Conservatives set out a shift away from their focus on home ownership to boosting all kinds of housing types, including build-to-rent and shared ownership.
The next housing minister — who will be the fourth person to hold the post within five years — should do more to address the needs of young people who played such an important part in the election result, said Jon Neale, head of research at agency JLL.
“It must now surely be time for all parties to prioritise an issue that has had more negative impacts on young people than any other, and increasingly erodes the competitiveness of the British economy,” he added.
Reporting by Claer Barrett, Aime Williams, Vanessa Houlder, Lucy Warwick-Ching, James Pickford and Josephine Cumbo