U.K. Election: For the Moment, Do Nothing; Maybe Buy Some U.K. Stocks Later

 | Jun 09, 2017 | 3:32 AM EDT
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Prime Minister Theresa May called the snap election because she wanted to get a bigger majority than she already had in order to have a stronger hand in Brexit negotiations. She lost the majority her Conservative party had, and now uncertainty about the U.K.'s path out of the European Union has risen again.

One of the best descriptions of the situation belongs to Conservative lawmaker Nigel Evans, who told the BBC: "We didn't shoot ourselves in the foot; we shot ourselves in the head." U.K. newspapers are in shock, with the word "gamble" and "fail" on many front pages.

How should investors react to this situation? For the moment, perhaps the best thing is to do nothing. The pound fell sharply as it became clear overnight that the Conservatives were losing their majority. The FTSE 100 opened 1% higher early on Friday, because a lot of the blue chips it includes benefit when the pound falls. But the domestically focused FTSE 250 was 0.5% down at the open. 

Still, the pound is not reacting as badly as it would if investors had abandoned all hope. FactSet showed it was down around 1.2% to the dollar to $1.263 a few minutes before the London market opened. It gained ground to trade down 0.92% on the day, at $1.267 two minutes after the open, and was stronger still, down 0.8%, at $1.268 eight minutes after the open. Some of this may have to do with hopes of a "soft" Brexit being revived.

One scenario in the event that the Conservatives don't manage to form a government and the task goes to Labour is that a "soft" Brexit, where Britain remains in the single market but in exchange accepts many of the European Union's rules, would be firmly on the table. That option would be the one preferred by the markets, because it would result in minimum upheaval.

Such an outcome is far from certain, however. Hardline supporters for leaving the EU from the Conservative party could feel emboldened by May's weakness and push for a "hard" Brexit. This would risk a cliff-edge Brexit on March 29, 2019, when the two-year period allowed for talks expires.

For now, the best bet for investors is to stay away from U.K. assets altogether but look out for buying opportunities, as this is a chance to grab bargains in a dynamic economy with strong companies.

Those tempted to short the pound should remember that events move very fast, and political statements that could reverse the currency's course are very likely. Besides, the Bank of England probably stands ready to defend sterling if needed, and probably also to pledge more asset purchases if things get really scary.

Investors could look for buying opportunities among the internationally oriented companies, such as those in the energy, mining, technology, health care or telecommunications sectors. It may be a good idea to stay away from financials such as banks, especially the smaller, challenger banks heavily exposed to the property sector. Real estate is best avoided, too, for now.

For updates on the results and on negotiations to form a government, keep an eye on TheStreet's main page, thestreet.com.

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