UK election: Top post-election trades

That last night's election results was a shock is not in doubt. Yes, polls showed Labour leader Jeremy Corbyn's popularity increasing through the campaign, but it was still Theresa May's to lose.

Now, with the possible replay of 1974 and another election within 12 months, financial markets are volatile.

However, with investors seeking opportunities to exploit anomalies, we take a look at how the City reacted to the result and where experts there think the best trades are right now.

"Despite uncertainty, the market's response has been fairly predictable with sterling falling, the overseas earners of the FTSE 100 rallied and more UK-focused companies falling," explains Chris Bates, investment strategist at investment manager Smith & Williamson.

"Despite the initial fall we could well see sterling picking up in the next few weeks given that Theresa May's ability push for a hard Brexit has been significantly compromised.

"We expect to see a softer Brexit now, and a resultant rise in sterling. However, we also expect sterling to be weak in the near-term with further volatility over the coming days.

"Big overseas earners, rather than UK domestic stocks, will still continue to garner attention. In the interim, the FTSE 100, which has significant foreign exposure, is likely to be favoured over domestic focussed smaller caps and the FTSE 250."

Chris Stevens at UBS looked at the travel and leisure sector.

InterContinental Hotels is the main beneficiary from a weak pound, he says, while Whitbread makes 100% of its profit in the UK. Amusement park operator Merlin – 40% of revenue from the UK and rest overseas – could benefit from a weaker pound and increase in inbound tourism.

Caterer Compass makes 60% of operating profit from the US and reports in sterling, "so there should be a positive FX translation benefit". However, currency could impact demand from UK holidaymakers, hurting tour operators.

"TUI's largest customer base is the UK (c30% of customers), which could see reduced demand due to weaker consumer confidence and also the weak sterling discouraging would-be holiday makers from booking a trip," says Stevens.

"Following the Brexit vote, sterling's depreciation drove a c10% hit to TUI's underlying EBITA."

Gerald Khoo, an analyst at Liberum: "Stocks with perceived domestic exposure could be sold off, potentially opening buying opportunities for groups actually mostly overseas exposed, namely FirstGroup, which is 80% non-UK profit and National Express, which is 70% non-UK.

"The groups with overseas earnings would also benefit from any material weakening of sterling. Obvious havens that could get caught up erroneously in broad-based selling would be BBA Aviation, which has minimal UK exposure and Clarkson, which has no UK domestic economic exposure and is a predominantly US dollar earner."

John Stopford, head of multi-asset income at Investec, says: "In equities, we hold a modest exposure to UK-listed exporters primarily, with most exposure in other jurisdictions. We have almost no UK bond exposure.

"For value investors valuation trumps politics every time," adds Investec portfolio manager Alastair Mundy. "We would expect to be adding further in the area of domestically-exposed UK equities area if we see further share price falls.

"Equity valuations remain high (somewhat paradoxical given how often we are told that markets hate uncertainty) and we are keeping our powder dry for cheaper buying opportunities."

"Scope remains for markets to grind higher," according to Anthony Willis, investment manager at BMO Global Asset Management. "We should remember the economic and corporate backdrop continues to be supportive. However, we are in no rush to increase our market exposure across the portfolios.

"Our view in the short term remains to stay underweight the UK, though we remain cognisant that the changing shape of politics may have significant consequences for policy on Brexit, which in turn will impact the economic outlook."

James Ross, fund manager, pan-European equities at Janus Henderson, agrees: "We reduced our UK weighting in the run up to the Brexit vote, we pulled it down further after the result and feel that an underweight-UK stance remains appropriate."

Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, says: "We think that sterling will remain under pressure in the days ahead and are watching the 1.25 level carefully as we noted pre-elections. UK equities are likely to fare better, in our view, helped by currency depreciation.

"However, we believe that upside potential remains capped, especially relative to continental Europe where fundamentals seem to be improving fast alongside a very dovish ECB; continental Europe remains our core value call in the equities space.

"Broadly, we see this election result as having little impact on global risk sentiment and we remain positive on emerging market local currency debt and equities."

Dominic Rossi, global CIO at Fidelity International: "The uncertainty will put a lid on the UK equity market. The prospect of another election within next few months, coupled with the Brexit negotiations which are more unpredictable than before, raises the risks for all investors in UK equities."

David Docherty, fund manager, UK equities, Schroders, said: "An initial flight to safety is likely in UK equities as investors favour resilient companies with international earnings.

"Economically-sensitive domestic consumer companies, such as general retailers, may be vulnerable to a weakening pound. This is because foreign exchange moves impact their profit margins and the real disposable income of their customers. Other domestic financial stocks such as banks, housing and real estate may also be weak.

Will Hobbs, head of investment strategy at Barclays Wealth & Investments: "For investors, even those allocating funds only to UK quoted assets, the message remains the same – your time will be more profitably spent focusing on the primary influences on UK assets, namely the global business cycle and the path of commodity prices."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.