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Markets shrug off May’s departure

Tom Stevenson

Tom Stevenson - Fidelity Personal Investing

Markets react to the unexpected, not simply to dramatic headlines. The resignation of Theresa May took no-one by surprise, and both shares and the pound have taken the Prime Minister’s departure in their stride. What happens next in Westminster is shrouded in uncertainty, but that has been the case for as long as anyone can remember. Nothing to see, move on.

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The fact that Mrs May would be leaving Downing Street has been the worst kept secret in politics. Her failure to deliver Brexit has eaten away at her support within the Conservative party, fractured her Cabinet and almost certainly led to a calamitous drubbing in the European parliamentary elections. It was a matter of when not if.

Because of that, the recent fall in the pound has paused for breath. Sterling recovered $1.27 after the Prime Minister’s emotional announcement, although the pound remains close to its low point for 2019. The FTSE 100 also partially recovered the previous day’s slide, adding nearly 1%. The yield on the 10-year government bond was marginally higher, suggesting little appetite for safe haven investments.

What happens next remains uncertain. The Conservative party will stage a leadership election, with the smart money currently riding on Boris Johnson to get the job he has aspired to ever since his bid to enter Downing Street was scuppered in 2016 by fellow Brexiteer Michael Gove. What this all means for the Brexit process itself is unclear.

The odds will have shortened on three possible outcomes: a no-deal exit as Johnson attempts to renegotiate with Europe, is rebuffed and walks away; a second referendum as it becomes clear that there is no way out of the Brexit morass without asking the people to decide again; and a general election.

The last of these possible outcomes was the focus of several questions at an investor seminar we held at our London office earlier this week. Rather than worry about Brexit (we’ve all given up trying to second guess that), investors are quite rightly focusing on the possibility of a Labour government in due course.

What might this mean and what can we do about it, are the principal questions. I touched on the subject this week here and will return it in my weekly Telegraph column on Monday.

For UK-based investors, British politics is obviously a concern but the market’s sanguine reaction to the news confirms that the bigger picture is more important. Trade tensions, concerns about the oil price, the outlook for corporate earnings, interest rates - all of these are bigger influences on stock markets than our own domestic considerations.

It is worth remembering that the UK stock market represents only 6% of the global total, measured by market capitalisation. The best way to navigate the ups and downs of UK politics is, therefore, to remain well-diversified geographically and across different asset classes.

Global equity funds like the Rathbone Global Opportunities Fund and Fidelity’s Global Dividend Fund are good ways to achieve this diverse exposure to the world’s stock markets. It is also worth considering the Fidelity Select 50 Balanced Fund as a way of achieving a smoother ride through the current uncertainty.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.