It was a long night and still early days in the complex games of manoeuvre that will inevitably follow confirmation of a hung Parliament. What if any investment conclusions can be drawn at this moment?
A Tory-Lib Dem agreement is the only one that can effectively guarantee the stable and effective government that all parties say they now want. However it is far from a certain outcome.
An agreement between Labour, the Lib Dems and assorted other parties looks on the face of it more doable, but is also riddled with complications that will incur costs (eg bribes to the Celtic countries) that are directly inimical to the urgent crisis measures that the growing debt crisis demands.
Time is short. As the unfolding drama across Europe has shown, political hesitancy in tackling issues can be costly. But it will be costly too if the crisis measures that are eventually agreed lack the popular support needed to be implemented effectively.
All of these factors point to a continuation of sterling weakness until an outcome becomes clearer. The fact remains however that the UK is still a sideshow in the broader market and Eurozone debt crisis that has been raging all week.
Jim Rogers suggested yesterday that, putting aside the rogue market action on Thursday as an aberration, the sharp fall in world equity markets over the past week has actually been no more than a necessary correction after a very strong equity market rally since the start of February.
That is true, to the extent that what has happened in the last five days is perfectly consistent with a sharp but normal reaction to the unprecedented ten weeks of continuous advance on Wall Street and other markets that preceded it. With hindsight, both the Eurozone crisis and the UK election may still however prove to look like an overlay on this normal cycle of market action, rather than its cause.
You cannot read into what has happened therefore the certainty that the bull market, or bear market rally (call it what you will), is over. However it would be no surprise if the equity markets were now in for a period of consolidation short term. Risk has returned to centre stage in the global financial system and investors who have been persuaded themselves to step back into the arena could easily be pushed back into their shells again.
This is not to say that dramatic warnings about the consequences of the Greek crisis are without foundation, merely that the collapse of the Eurozone and/or debt default is not a high probability in the short term. For now my favoured strategic stance remains fixed on above average equity exposure (through “quality” companies), minimal exposure to government bonds and healthy holdings of both gold and cash, with some property now being gradually added to the mix. The longstanding bias in favour of commodities also remains.
It is worth remembering Sir John Templeton’s timeless advice that the place to look for the best investment opportunities is never where the prospects are brightest, but where they look the most dire. That is the argument behind looking at shares in BP, for example, whose external reputation can rarely have sunk any lower than it is today.
