Pound to Fall and Stock Markets to Wobble Then Rise

Given the General Election in 2 days and interest rates likely to be cut in August or September, we decided to take a look at the likely movements of the pound and stock markets over the summer.

Historically, the £ sinks on political uncertainty.  The £ fell to a 5 year low during the General Election of 2015 and again in 2016 when David Cameron resigned in 2016 after the Brexit Referendum.  When you look at all elections since 2000, the £ has usually weakened and only once remained steady.

The strength of the £ affects stock markets too.  A weak £ means FTSE 100 should climb as big companies who mainly earn overseas on $ or €, bring back even bigger profits when converted to a weaker sterling.  Other UK stock markets such as FTSE 250, 350 and All Share where mid-range companies usually trade domestically weaken as imports or goods and materials become more expensive with a weak £.

Crystal Ball Comment

We have been telling many clients during investment fund/allocation reviews over the last few weeks that we expect interest rates to hold until Autumn but could be cut in September, stock markets to temporarily weaken around the Election period on uncertainty and then to recover when interest rates are finally cut.  Sterling should recover and then remain stable if the Federal Reserve and the Bank of England cut rates at around the same time.

We do not think currency or stock market movements will be severe and you may choose to ‘ride it out’ because when interest rates do fall, we expect new stock market records across many sectors and bond/gilt/fixed interest funds to recover provided there are no ‘shock’ events involving Russia/Ukraine,China/Taiwan, North/South Korea and Gaza.