Fears that political uncertainty will hurt consumer spending have hit shares in UK retailers and housebuilders.
The prospect of a hung parliament and speculation about the election result’s impact on Brexit saw the value of sterling slide against the dollar.
Although the FTSE 100 closed 1% up – boosted by companies that earn profits in dollars – domestic stocks like Next and Barratt Developments were hit hard.
“Disposable incomes will be stretched,” said analyst Nicholas Hyett
By late afternoon trading, sterling was down 1.7% against the dollar at $1.2735.And against the euro, the pound was down 1.5% at 1.1377.
The weakening pound makes imported goods’ prices higher and squeezes consumers’ ability to spend.
Mr Hyett, from Hargreaves Lansdown, ran through the affected sectors: “Housebuilders are down across the board, but they’re joined by restaurants, high street banks, fashion retailers and media outlets.
“The implication is clear, consumer’s disposable incomes are expected to be stretched, and big ticket items, like property upgrades, as well as little luxuries.”
Housebuilders, including Taylor Wimpey and Persimmon, saw falls of up to 5%, but recovered slightly to finish between 2%-3% down
Retailers were also big fallers, but pared loses in late trading. Next closed 1.75% down, and Marks and Spencer closed 1.8% lower.
Banks most dependant on the UK were also hit. Royal Bank of Scotland closed down 2.4%.
However, shares overall were higher with the benchmark FTSE 100 index up 1% at 7,527 points. Miners and commodity stocks were among the main gainers.
A fall in the value of the pound tends to boost the FTSE 100 as the majority of companies in the index have significant operations overseas. A weaker pound means profits earned abroad are worth more when converted back into sterling.
Traders had been expecting a clear victory for Theresa May’s Conservative Party. It is still the largest party but will be short of the numbers needed to be fully in charge.
Investor sentiment was not helped by the latest UK industrial production figures, which showed output rose by less than had been expected.
While the pound’s move is significant, it is far less striking than that seen in the aftermath of the Brexit vote last June, when it plunged more than 10%.
Some analysts say that might reflect the diminishing prospect of a “hard” Brexit.
Former Business Secretary Sir Vince Cable said “the whole Brexit approach will have to be rethought”.
Sir Vince is returning to the Commons after regaining the seat of Twickenham in southwest London for the Liberal Democrats.
Domestically, some commentators are suggesting that the Conservative government’s long-running austerity programme, which has seen public spending constrained in a bid to cut UK debt, may be over.
But Jim Leaviss, from M&G Investments, said: “There may be less austerity and fiscal tightening in future under a weakened Conservative Party, but there will be no significant rise in gilt issuance [government IOUs] and the goal of reducing the UK’s debt/GDP over the next few years is likely to remain in place.”