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Hung parliament in UK: Investors brace for volatility

Sterling has taken a hit and yields on 10-year gilts initially dipped, but the main FTSE stock index edged higher, recouping early losses, as the UK woke up to anything but a ‘strong and stable’ government.



The pound lost 1.5% against the dollar, falling to around the $1.2750 mark, while commentators expect the FTSE to take a nosedive this morning on the uncertainty.

“We are likely to see some initial market volatility today but once that has calmed down, hopes for a softer, less combative approach may help the pound and also the UK stock market in the face of the uncertainty which the election result throws at investors,” said Russ Mould, investment director at AJ Bell.

“Any talk of a softer Brexit could help financial services stocks and banks, while any marked pound weakness could put the spotlight back on those overseas plays, exporters and dollar earners who did well in the wake of the EU referendum result but have lagged the FTSE All-Share’s more recent advances – the miners, the oils and US-exposed names like Ashtead and Wolseley.

In the short term, the identity of the next prime minister and the parties who form any coalition will go a long way to shaping sentiment.

Paul Flood, multi-asset portfolio manager at Newton Investment Management, said concern should now be on the direction of the UK economy, though added that large-cap global companies may out-perform domestically orientated companies given the global revenue streams and overseas earnings. 

“Currency weakness may lead to higher inflation in the UK, which is supportive of assets with inflation-linked revenue streams such as renewable energy assets to outperform government bonds, which are likely to come under pressure as lower economic growth leads to higher government borrowing against a more inflationary pressures from a weaker currency,” he said.