UK equities are unlikely to remain spooked by prime minister Theresa May’s announcement of a snap UK election on 8 June over the medium term, according to a number of industry commentators, although they warn of heightened market volatility until the election result is known.
The motion – which will require two-thirds of MPs to back it - was called by May this morning, who cited her reasoning for the surprise announcement as disharmony in Westminster and the negative impact this is having on the government’s attempts to prepare for Brexit.
The announcement comes despite the fact that May, who became prime minister in July last year, initially said there should be no general election until 2020.
While the FTSE 100 has fallen more than 1 per cent so far this morning, sterling has recovered from its initial drop which occurred shortly before May’s speech, rebounding sharply against the US dollar.
Performance of index on 18/04/2017 to 14.30pm
Source: Google Finance
Adrian Lowcock (pictured), investment director at Architas, says politically the timing might not get any better for the Conservatives to win a general election and increase their majority, given the UK economy has remained strong since last June’s referendum and UK equities are trading at all-time highs. 
“General elections create uncertainty and markets do not like uncertainty. The market has begun to price this in and there is likely to be an ‘uncertainty discount’ on the UK stock market until the election result is known,” he said.
“Given that the FTSE 100 is trading close to all-time highs and we are seeing an increase in geo-political uncertainty investors should prepare for increased volatility over the coming weeks and hold a diversified portfolio of equities and bonds as well as property and gold.
“Having some cash set aside at times of uncertainty will give investors the flexibility to act as more information becomes known.”
Russ Mould, investment director at AJ Bell, says the FTSE 100 may not remain rattled for too long, assuming the opinion polls and history is anything to go by.
“Analysis of general election results since the inception of the FTSE All-Share in 1962 shows that the index has tended to do better, on average, under Conservative prime ministers. This may offer some comfort to investors who are nervous, especially as Mrs May has a big lead in the polls,” he reasoned.
“In addition, the historic data also shows how the mid-term elections of 1966 and 1974 failed to derail stocks.
“In this case the UK stock market seemed unconcerned by either the party affiliation of the person in charge or the size of their majority – so while Mrs May will want to add to her party’s haul of seats in Westminster this may be less of a concern for investors, relative to the overall result.”
Mould adds that, based on history, the UK market has tended to prefer a win from the prime minister holding office at the time regardless of which political party they represent.
“However, the opinion polls’ recent sketchy record and the dangers of using historical performance as a guide to the future mean stock market investors are unlikely to take too much on trust and may remain edgy until the result becomes known on 9 June, given that policy on such huge issues as Brexit and Scottish independence, as well as the state of the nation’s finances and economy, are set to be a source of fierce debate once more,” he warned.
Neil Wilson, senior market analyst at ETX Capital, says the snap election adds another layer of uncertainty to the geopolitical backdrop for UK investors and agrees that volatility is likely to remain elevated over the coming weeks.
“As elections are so unpredictable, there is always the outside risk it could spark a reversal in the entire Brexit process. Can the Lib Dems cobble together a pro-Remain ticket that upsets the Tory apple cart? However on the current polling the likelihood is we will be left with a government on a more secure footing that will ensure Brexit means Brexit,” he said.
The market analyst says the early election yields a number of advantages for May, given that it strengthens her hand in Brexit negotiations both in the UK and in Brussels. He also points out that the Conservatives have a significant majority lead in the polls at the moment, so it is therefore advantageous to the party to exploit this advantage before the Brexit negotiations intensify.
“Undoubtedly there are drawbacks too. She needs to overcome the Fixed Term Parliament Act, but most MPs are likely to back her. She needs a two-thirds majority. Whether a beleaguered British public has the stomach for another national vote is another matter,” Wilson said.
“Arguably a stronger government might be able to get a better deal for the UK and this could support sterling, but this is likely to be at the margins. A stronger Tory majority government could push through a more aggressive version of a hard Brexit that is negative for the pound.”
Performance of sterling vs US dollar on 18/04/2017 to 14.00pm
Source: XE
Mike Amey, head of sterling portfolio management at PIMCO, agrees that the prime minister’s decision to call a snap election is not without risk but, given the Conservatives’ 20-point lead in the polls, says the party should be able to materially increase its working majority in parliament.
“This would give the government more room for manoeuvre during the Brexit negotiations and make the government less exposed to the more right wing factions within the party,” he explained.
“All else equal that should lower the risk of a very disruptive Brexit as the government should be able to plot a less confrontational exit from the European Union. Whilst the initial market reaction has been muted this should reduce the risk premium in UK assets, put upwards pressure on UK gilt yields and potentially support the British pound.”
Paul Mumford, who runs the four crown-rated Cavendish AIM fund, says the snap election is welcome news which will manifest itself over the longer term once the initial reaction has subsided.
“Even without the proposed boundary changes, everything points to the Tories being elected with a substantially increased majority – which will give the government a firm mandate and put it on steadier, more solid ground as it begins the difficult, complex work of negotiating Brexit,” he said. “This can only reduce uncertainty and the potential for hiccups over the next couple of years, so it's a sensible move.”
However, M&G’s Steven Andrew warns that a Conservative majority vote on 8 June should not be taken for granted, given the events of 2016 and the fact we are only one election into the UK’s Fixed Term Parliaments Act.
“Confident predictions of the outcome of June’s vote should be avoided,” he said. “The path between here and 8 June is unlikely to be a smooth one. To the extent that this leads to volatility in financial markets, it is important that investors are alive to the potential opportunities that such price behaviour may present.
“As always, we remain focused on the things we can know rather than the things we cannot. Appraising the UK investment landscape in this context suggest to us that equity assets remain attractively priced – especially in the context of a robust UK and strengthening global economy.
“With that in mind, we would look to add to our UK equity positions should political-inspired volatility offer material discounts from here.”