The calling of a June 8th general election in the UK has offered material support to Sterling, and in turn, modest weakness and volatility to blue chip equities that have dined out on ‘cheap Sterling’ since the referendum last summer.
Perhaps unsurprisingly however, the small cap end of the UK equity market, has largely been unmoved by such currency moves, being less exposed to overseas earnings. This ‘dismissive’ behaviour of small caps is appealing during a period of increased uncertainty, where one can focus on company fundamentals, rather than trying to second guess the movements of sterling in the short term.
At Coram Asset Management, the UK subsidiary of MitonOptimal, we have been developing our exposure to small- and indeed micro-cap investments in recent times. Though they are certainly not ‘bomb proof’ from global or currency related ‘risk off’ events (as the ripple effect on investor sentiment often carries a long way) these areas of the UK market offer some comfort that the sensitivity to such events is somewhat muted.
The currency, and by consequence the equity market, is all but pricing in a Conservative party walkover, and it would take a brave person to bet against that outcome as things stand, with the recent local elections only further strengthening that belief. The adage ‘it is better to travel hopefully than to arrive’ is true here – Sterling is unlikely to see much more upside based on a Tory party victory, as it is now all priced in. However, other events could, of course, continue to lend support.
Political developments in Europe are perhaps less clear cut. Manifestos there largely take polarised stances – remaining in the EU or not. Of course, should the ‘non-populist’ parties succeed, then the headlines will be that the establishment has regained control, but we must not lose sight of the fact that the balance of power is shifting.
Those parties wishing to unite the union, of course, attempt to give the UK a metaphorical kicking to send a message to other states who may have thoughts about following suit. As we move forward through the ‘BREXIT’ process, the EU is beginning to feel more like the Hotel California, where one ‘can never leave’.
The objective of the EU right now should be to create a union so appealing that no one should want to leave, rather than hold it together through fear. This method will not lend itself to creating long term healthy relationships between member states.
Given what is at stake, politics is having an overly significant influence on the currency and in turn the equity markets and is likely to continue to do so throughout 2017. Focusing on the lower end of the market capitalisation spectrum, until the uncertainty passes, may offer some form of respite.UK Small Caps - Sheltered from the Political Winds?