Snap general election could hammer the Footsie

So here we go again. After the Scottish referendum in 2014, the general election in 2015, the EU referendum in 2016, we now have Prime Minister Theresa May’s snap 2017 general election. Add in a load of local council elections and by-elections and anybody might think people actually enjoyed these things.

Certainty ratio

Markets, which famously hate uncertainty, can go a bit queasy at the prospect of a plebiscite, especially if the result is in doubt. The FTSE 100 (INDEXFTSE: UKX) flew on the certainty that the Scottish Nationalists’ defeat and David Cameron’s clear Tory majority appeared to bring, but crashed after the Brexit shock.

However, the seven-week electoral campaign promises to have the opposite effect. Instead of the uncertainty of May’s fragile Parliamentary working majority of just 17, early polls suggest she could enjoy the political comfort that comes with a 100 or even 200-seat lead. Some commentators have described this not as an election but a coup, but that won’t worry markets. This will be a very British, very democratic coup.

Pound for pound

Despite this, the FTSE 100 isn’t flying. Some £46bn was wiped off Britain’s biggest companies yesterday in the worst day since Brexit, as the pound rallied to a six-month high.

Ever since Brexit sent the pound crashing and FTSE 100 soaring, investors have understood that a weak domestic currency is a fillip for the UK’s benchmark index. Most of its constituents are multinational companies such as miners, bankers and oil giants who generate more than three-quarters of their revenues overseas. Their vast foreign earnings are automatically worth more once converted back into a plunging pound.

Bottom dollar

The FTSE 100 may have ended 2016 at a new all-time high, closing the year up 14.42% and adding about £232bn to the value of Britain’s top companies, but it actually fell 5% in US dollar terms. After dipping to $1.255 prior to Mrs May’s announcement – when some even thought she might be tendering her resignation – it flew to a high of $1.29 and currently trades at about $1.28, well up on January’s 31-year low of around $1.21.

The FTSE 250, which has a far greater domestic focus, behaves differently. It benefitted less from the falling pound last year, and is doing better now. It dipped 0.74% yesterday against 1.2% for the FTSE 100, which is down again today, while the FTSE 250 is up 127 points at time of writing.

Brexit is coming

The more commanding May’s majority after 8 June, the higher the pound is likely to climb, as markets assume this will hand her a bigger mandate to take on the EU in Brexit negotiations. The pound has also been helped by political uncertainty in France, as the chance grows of a final run-off between hard right and hard left, in the shape of Marine Le Pen and Jean-Luc Mélenchon, which makes May’s Britain look an island of political stability by comparison. Mixed US data has also boosted sterling.

Markets would still prefer a soft Brexit to a hard one, but what they would like most of all is a certain Brexit, and the snap election can help to bring that closer. Recent dips look like a buying opportunity to me.

The political uncertainty is set to continue and whether you voted Leave or Remain, your portfolio will not escape the fallout.

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