Estimated reading time: 3 minutes
The foreign exchange markets trade 24 hours a day throughout the working week. When the exit poll was released at 10pm on Thursday, showing the Conservative party were on track to win their biggest majority since the 1980’s, sterling jumped in value.
Once the London stock market opened on Friday morning, all UK-centric assets had an even bigger rally. UK domestic stocks such as banks, homebuilders, retailers and property companies outperformed the more international sectors by a wide margin.
This reaction was driven mainly by the prospect of the shareholder unfriendly policies put forward by the Labour party disappearing; and a belief that with a strong majority, Boris Johnson can now push the Brexit process further along. There is still lots to do, but the biggest hurdle to date has been getting Parliament to approve the Withdrawal Agreement Bill*.
Now it looks destined to get approval and reduces some of the uncertainty that has existed.
Global asset allocators, such as pension funds, sovereign wealth funds etc... should feel less anxious about investing into UK assets and we could well see sentiment towards even large UK companies improve (despite the headwind of a stronger currency).
The prospect of sterling appreciating against other major currencies was the main risk we tried to hedge in our November rebalance.
As we warned, an increase in sterling means that in a globally diversified portfolio, the value of all non-UK equities drops when converting back to sterling.
For example, an ETF tracking US equities** rose by 2.44% from the 13th of November to the 13th of December. However, when we account for the increase in sterling (and the corresponding decrease in the dollar), the return drops to a loss of 1.13%.
The table below gives more examples. It contains two columns; one shows the immediate impact of the election result on Friday’s performance; the second shows the impact over the past month (from the 13th of November to the 13th of December).
It shows how adding the UK Property and Mid Cap exposure in November added value to portfolios (this was with the iShares UK Property and the Vanguard FTSE 250 ETF’s).
Without the changes in November, over the past month a balanced portfolio would have fallen roughly 0.64% - meaning the changes added 0.88% and changed a loss into a gain.
Now this is very short term. The vast majority of the time, investors should ignore day to day noise and let portfolio returns compound over time. It’s only on rare occasions that we see days where such a change occurs in markets.
All the same, it has illustrated some lessons:
1) Fund flows matter – the valuation of UK centric assets has looked cheap for some time now but lacked a catalyst to move higher. When the result came in, it looks like a number of investors that had been eyeing these cheap UK assets, decided to start buying.
2) Politics matters more now - In the recent past, political parties have fought for the centre ground and their policies haven’t been extreme enough to make big moves in markets. As politicians have moved further to the extremes, markets have had to price in bigger risks, and this results in bigger price moves.
3) The importance of tactical asset allocation – this is simply the term used to describe the process for making short term changes to a portfolio’s asset allocation. We often refer to it as being ‘agile’. Adding in UK centric assets is an example of how it can add value and boost portfolio returns.
The Rosecut Investment Committee meets formally on a monthly basis to consider whether any tactical asset allocation moves are required. In some cases, we meet in between months if we need to react to what is going on in markets. Most of the time however, they are not needed – in keeping with our long-term approach.
When we have made changes, you can usually hear us speaking or writing about them, by subscribing to our newsletter at the bottom of this page.
As ever, please remember: Past Performance is not a reliable indicator of future returns
* If you want to remind yourself of the EU Withdrawal Agreement Bill click here:
** We have used the iShares Core S&P 500 ETF (ticker CSPX.L) in this instance.