Don’t ignore the snap election but focus on the risk of the French ‘nightmare scenario’

After months of consistently denying the possibility of an early election, UK Prime Minister Theresa May, on Tuesday, revealed the UK will go to the polls on 8 June. The move is clearly a surprise but take a step back and it becomes entirely logical.

May’s Conservative Party is miles ahead in recent polling – with a comfortable lead over a Labour Party viewed by many as in disarray under the leadership of Jeremy Corbyn. While the pro-EU Liberal Democrats could win back some ground on its disastrous 2015 election result, its leader Tim Farron remains largely unknown to many. The threat of UKIP taking right-wing votes off the Conservatives is also much less relevant given that it has achieved its most significant policy aim.

Should the Conservatives win comfortably, as is currently expected if the current polling is to be believed, the stronger mandate would undoubtedly be helpful through the two-year Brexit negotiations with European leaders as well as reducing the influence of the right of the party on those discussions. An election in the original 2020 date would have been a distraction given the likely timing of the Brexit.

Having said all this, June is a long way away and a lot can change. Also, pre-vote polling has not been the most reliable indicator in recent times – as David Cameron and Hillary Clinton could attest!

UK government bonds hardly moved on the election announcement. The major move was in currency markets, with the likely added certainty through the Brexit period – on a likely Conservative victory – propelling sterling to a three-month high against most major currencies.

While the election dominates news in the UK, no one should take their eyes off political developments across the other side of the English Channel. Uncertainties surrounding the French Presidential elections have been clearly escalating in recent days. After strong debate performances, support for far-left candidate Jean-Luc Mélenchon has been growing. Mélenchon, who often reveals an admiration of former Venezuelan President Hugo Chávez, has called for a 100% top tax rate and is against free trade and the EU. With both Mélenchon and far-right candidate Marine Le Pen performing well in the polls investors should be alert to the risk of these two emerging as the candidates for the second round of the ballot. Markets will be hoping centrist Emmanuel Macron can hold on to his slight lead or that Francois Fillon continues his recent renaissance. But the polls are getting closer and risks are increasing.

So, what should investors do in the face of this uncertainty? As we have mentioned on numerous occasions, diversification is vital, because as has been demonstrated this week, it is an unpredictable world. Diversification across sectors and asset classes can help to protect investor downside during periods of heightened volatility.

The value of investments may fall as well as rise and investors may not get back the amount invested.

This information is for professional advisers only. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice.

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CLI00746 Expiry on 20/04/2018

David Marchant

David Marchant

Chief Investment Officer, Canada Life Limited & Managing Director, Canada Life Asset Management Limited.

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