The feel-good factor’s back ... but beware clouds ahead

THE stock market bounced last week the moment the exit poll indicated the Conservatives had won the General Election with a decisive majority.

The FTSE 100 Index was up 3.5 pc and the FTSE 250 up 4.5 pc on Monday from preelection-result levels — a welcome boost to the value of our pensions and investments.

Yesterday morning the FTSE 250 was up even further to 5.4 pc since Boris Johnson was elected, meaning someone with £100,000 invested would now have an extra £5,400.

‘The markets were crying out for clarity,’ says Patrick Connolly, a chartered financial planner at independent advisers Chase de Vere. ‘Now there’s a degree of certainty on what will happen with government spending and Brexit. That’s helpful to both UK business and foreign investors, and so the stock market has gone forward.’

But some experts are warning that a few clouds still linger. ‘We shouldn’t get carried away because there’s still the Leave agreement to negotiate,’ says fund selector Gary Potter, co-head of BMO multi-manager solutions. He adds that international problems, including the U.S./China trade war, slow growth in Europe and the escalating tensions in Tehran, could weigh more heavily on share prices than domestic issues.

‘The UK stock market is actually more reliant on whether the U.S. can pull itself out of the anaemic growth phase it appears to be starting.’

Bearing all these factors in mind, how should investors react? One area tipped to shine is small and medium-sized British companies serving a UK customer base. Investors have shied away from such firms due to Brexit concerns and share prices were battered as a result. Now the path to Brexit is clearer, this sector could thrive.

‘There’s more optimism around these companies,’ says Mr Connolly. ‘If you’ve been avoiding this area, there is a case for putting money back in.’

His preferred funds are JOHCM UK Dynamic and HSBC FTSE 250 Index. The former seeks out good companies which have temporarily fallen from favour, while the latter tracks the ups and down of the FTSE 250 Index of medium- sized UK companies.

The funds have turned a £10,000 investment into £15,550 and £15,230 respectively over the past five years, data from FE Trustnet reveals.

At investment platform AJ Bell, personal finance analyst Laura Suter is also more positive on the prospects for UK shares.

‘If there is greater confidence in UK politics and Brexit, UK shares could regain some of the ground lost against their overseas counterparts,’ she says.

Ms Suter likes the Jupiter UK Special Situations Fund and the Temple Bar Investment Trust, essentially a company that invests in shares. Both focus on sound but currently unloved UK firms, such as insurer Aviva and Tesco, in the hope they will regain popularity.

The Jupiter fund has turned £10,000 into £14,480 over the past five years, while Temple Bar achieved £14,300 in the same time.

Another effect of the election result was a temporary rise in the value of sterling. But last night, £1 bought €1.18 or $1.31, slightly less than it would have done before the election, amid concerns over a no-deal Brexit.

If the pound were to recover again, UK firms selling to international markets might suffer. Prices for their goods would be more expensive, and therefore less attractive, to overseas buyers.

This factor particularly concerns large companies. In fact, 70 pc of the earnings of the FTSE 100 firms are derived from overseas. Funds that invest mainly or exclusively in this area may also see returns diminish.

Equally, funds that invest abroad may lose a little of their lustre when returns are converted to sterling.

For investors who may be tempted to pile into UK shares, Mr Connolly advises caution, especially as most of the gains may have been made already.

FOR him, the key to managing your investments through Brexit and beyond is to be properly diversified between the UK and abroad. If Brexit does go wrong, gains from international holdings might smooth out losses at home.

He picks either rathbone Global Opportunities or tracker fund L&G International Index as an easy way to add global flavour to your portfolio. These funds have grown an investment of £ 10,000 into £20,240 and £18,220 in five years.

For those who remain pessimistic, Ms Suter suggests funds that lean towards capital preservation more than capital growth.

She likes the Personal Assets investment trust, which holds government bonds, cash and gold as well as some shares. It’s made £13,020 out of £10,000 in the past five years.

Alternatively, investors could consider the strategic bond sector as a less risky option. Ms Suter’s choice is Artemis Strategic Bond, which has made £12,500 out of £10,000 in the same time.