Cutler Cook, Associate Director at PAAMCO in London, has put together the following brief comments on different post UK Election scenarios for hedge fund investments.
On what to expect
“As we saw after Brexit, we expect to see most of any market volatility play out first through the currency and from there through to stocks. We anticipate that a larger Tory majority will result in a stronger pound, which could in turn ripple through to weaker stock prices among exporters. Likewise, we would expect any lower-probability outcome, like a hung parliament, to lead to a sharp gap down in Sterling, with higher volatility in equity markets, though the potential for defensive performance from dollar earners.”
On expectations for hedge funds:
“The sharp downdraft after Brexit was weathered quite well by the hedge fund community in the UK, who protected client assets well, on average, during those painful few days, though longer biased funds got hammered. To the extent that we see further volatility in the aftermath of an unexpected election outcome, we would expect that hedge funds will seek to be nimble and to take advantage of any illogical dislocations that materialize as a result of uncertainty”
More young voters will know where their polling place on Thursday, having voted in record numbers at last year’s referendum, and opinion polls increasingly suggest that they are voting in opposition to their parents – with social background counting less than age for the first time. If this dynamic leads to unexpectedly high youth turnout, we would envision a negative surprise for the Tories and expect that the pound will slump and risk assets will suffer.
Further left field
In such an event, we wonder if there is an unforeseen scenario where unexpected coalitions form. Could there be a scenario where a previously disavowed coalition was built on the premise of a soft Brexit or a ‘BrexIn’ – where the UK technically exits the Union but remains In the single market. In which case, a likely bad scenario for Sterling and risk assets could turn very positive for Sterling, and would likely set off major rotations across equity markets, creating opportunity for nimble traders.