Brewin Dolphin : New Prime Minister, Same Concerns for Investors

• Theresa May, the UK's new Prime Minister, joins growing number of women in leadership roles around the world
• News impressed financial markets, but only modestly as they retain concerns about the UK economy in the wake of the Brexit vote
• Investors are still anxious. Bank of England likely to cut interest rates this week and pound remains weak

The Conservative Party has confirmed that its leadership election is complete and as a result the last remaining competitor, Theresa May has been declared the winner.

On Wednesday, she is due to become the Prime Minister of the United Kingdom. This is clearly a momentous occasion not least because Mrs May is a woman taking a role which has typically been held by men. It comes at a time when many of the most influential roles in the world are being held by women. This is symbolic of a world which is changing very fast but, dramatic as the news may be, it is not enough to reassure the financial markets.

As you may recall from our note in the aftermath of the EU referendum result, investors believe the referendum will have negative consequences for the UK economy. As such they are buying bonds despite the very low returns on offer. This indicates a sense of resignation that interest rates will now remain low for a longer period, indeed they may even fall (potentially as soon as this Thursday's meeting of the Bank of England's Monetary Policy Committee).

When the UK voted to leave the European Union, the FTSE 100 Index of leading UK shares reacted negatively. This we ascribe to the short-term actions of some traders and hedge funds.

Thereafter the index has rallied and has now risen more than 5% above its pre-Brexit high. That's because big companies with international revenues are unaffected by the prospects for the UK economy - indeed they become more valuable because of the weakness of the pound.

Other parts of the financial world which have reflected the UK's weaker economic prospects, in the collective judgement of investors, are the performance of smaller companies (more of whose revenues come from UK sales), the interest rates offered by UK government bonds (which reflect the likely future path of interest rates), and the value of the British pound.

All have fallen as investors agonise over how the withdrawal from the EU will proceed. Former Tory leadership candidate Andrea Leadsom had advocated an immediate withdrawal which would have commited the UK to reaching new trading arrangements within two years. No doubt this would be the stance of a significant group of voters who wish to leave the EU. Nevertheless it is one which would have diminished the bargaining power of the UK and increased the chances of the UK withdrawing from the single European market.

Despite having supported remaining within the EU in the recent referendum, May has committed to executing the will of the people. She has said that means leaving the EU and restricting the free movement of labour. At the same time, May values the UK's membership of the single market and recognises the impact leaving it could have on jobs and wages. Reconciling the objectives of restricting the free movement of labour with retaining access to the single market will not be easy but investors took a modest amount of comfort from the announcement that the new Prime Minister will try.

Today (Monday) saw UK mid-cap equities outperform their larger more international peers, the pound moved higher and the yields on government bonds rose. But these were small moves relative to the seismic shifts which have impacted the markets since the referendum.

Interest rates are still likely to be cut this week in what we assume will be a symbolic gesture of support for the economy. The pound remains at levels not seen since 2013 on a trade-weighted basis and buys fewer dollars than it could do at any time since the mid-1980s. Investors remain anxious even as they tentatively welcome their preferred choice of Prime Minister.

The value of investments can fall and you may get back less than you invested.

If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.