Uncertainty grows for FTSE 100 investors

As we navigate the difficult months of September and October, domestic politics is now thrown into the mix. The general election and a possible EU referendum are as likely as the Scottish vote to be too close to call. Over the pond, the November mid-term elections threaten to reopen wounds in America’s dysfunctional Congress.

The market’s sanguine response to this heightened uncertainty may not be as wide of the mark as it looks, however. That’s because, once the relief rally is over, the pound may run out of steam again. That would be welcomed in Britain’s internationally-focused boardrooms, where a common theme this summer has been the difficulty of growing profits and dividends under the weight of an overvalued pound.

One of the reasons why sterling might fail to regain its lost ground is that the Bank of England now has cover to keep interest rates lower for longer. It is hard to see the Bank turning hawkish faced with prolonged political uncertainty. Weak sterling and lower interest rates create a pretty benign market backdrop.

What’s the best way to play the new environment? First, I expect investors to get back to basics in the absence of clarity about the political context. Outside Europe, where a new wave of stimulus could lift all boats, markets are likely to become more discerning. There has been no benefit in spotting good companies in recent years because they’ve performed no better than the dross as everything floated on a tide of liquidity. Stock-picking will count again.

Second, after domestically-focused companies have bounced, large reliable companies, with diverse international businesses, will outperform small and mid-cap stocks. In an uncertain environment, investors will focus on safety and reliability.

As Europe, including the UK, looks inwards over the next couple of years, America’s recovery, buoyed by a rising dollar, will look increasingly attractive to investors. Reliable growth and sustainable dividends will be at a premium.

Five years from the start of the current bull market, we are entering the final phase in which brave investors will be able to capture good returns. The price they will pay will be higher volatility. Anyone who stayed up to watch the results on Friday morning may have had a taste of sleepless nights to come

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