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In this post-election Investment analysis, six wealth managers are warning investors to look to future implications of the Conservatives’ victory.
Lee Goggin, co-founder of findaWEALTHMANAGER.com, says:
The markets had factored in the uncertainty of a hung parliament, so when the election result became clear, there was euphoria in the City. A period of political stability for the UK has been a shot in the arm for the markets.
However, while the champagne corks have only just landed, many of the wealth managers we represent are urging investors not to forget future risk factors. David Cameron’s promise of a referendum on the EU and the economic drag which could be caused by the deficit are weighing on wealth managers’ minds – as is the spectre of another referendum on Scottish independence.
The “business friendly” Conservatives have wrestled control of the Houses of Parliament away from their coalition partners, who were soundly thrashed in one of the most extraordinary election days for generations. The Conservatives might not have won the hearts of the nation, but clearly won the heads of many independent voters, who recognised that excessive change at a time of economic uncertainty could be unhelpful.
However, the uncertainty is unlikely to go away for good and the Conservatives have a big job on their hands in the coming years. While sterling, UK government bonds and UK equities have all reacted positively, there will doubtless be fluctuations as we approach the European referendum that David Cameron promised in the last term. Moreover, our greatest concern is not over a potential “Brexit” in the later stages of this decade, but rather the ability of the new administration to close the twin deficits (fiscal and current account) in the years ahead. This is going to be a major challenge and could mean genuine “austerity” after the phoney war on spending was somewhat curtailed in 2012, following two years of economic hardship.
In terms of markets, there is no strong reason why UK equities shouldn’t outperform their global peers after a few lacklustre years relative to other regional markets. Of course, UK-listed companies are greatly exposed to the vagaries of international sentiment and activity, but the Conservative victory could aid markets’ performance in the coming years. For our part, we like many UK equities and, in particular, we view UK small cap equities as a potentially attractive opportunity after a couple of dull years and potentially supportive economic conditions in the years ahead. However this decision, like many others in the UK in years ahead, will at least now have a supportive political backdrop, after a few years of uncertainty. For this, and the fact that the election is over, we as investors can be grateful, although we suspect the real economic challenges for the Conservatives are about to start.
The relief rally in UK equities, gilts and sterling the day after the election was an entirely logical reaction to the election result and the prospect of a continuation of existing Conservative policy. Investor concerns over any negative implications of weaker sterling, particularly by international investors of UK assets, have been placated for now. Future debt issuance by the government should pass off uneventfully and benefit from subdued funding costs. The government will welcome the prospect of continued international capital investment into the UK.
While the FTSE did rise, so did most international equity markets. The rally in UK equities was sharply pronounced in domestic stocks such as the house builders, banks and utilities, which may have been adversely affected by a Labour administration. Absent from the rally were the larger international corporations, such as Unilever, SAB Miller and the mining stocks, that derive the majority of their revenues and profits from outside of the UK.
Although UK equities are an important investment market, they represent just under 8% of the global equity market by capitalisation and we have found very attractive opportunities in the US, Asia, Japan and latterly, Europe.
There are some lingering concerns post the election, notably the EU referendum promised by David Cameron and the ramifications of an overwhelming nationalist vote in Scotland, but these are not for today. Europe remains our biggest trading partner and with investors not liking uncertainty there could be unwelcome volatility around any future referendums during the tenure of this new government.
With an outright election win for the Conservatives now confirmed, markets have reacted positively. Sterling has rallied strongly following a bout of recent volatility, while the FTSE 100 surged above the psychologically important 7000 point level. However, initial excitement may be tempered once the dust has settled. There are several factors that should cause investors some concern, most pressingly the relationship between the victorious Conservative party and the SNP. Prior to the election, the SNP’s leader, Nicola Sturgeon, seemed hell-bent on removing David Cameron from power. That approach will need to change now the electorate has spoken. Sturgeon stated that another Scottish referendum was not her priority in the run-up to the election. With the election now out of the way, and decided firmly in Sturgeon’s favour, it seems inevitable that another referendum for Scottish independence is on its way.
The huge sway to the SNP ties in with another concern following the Conservative majority. David Cameron has promised an “‘in-out” referendum on British membership of the European Union. This could have a detrimental impact on both foreign investment into the UK, and domestic investment spending given the uncertainty of business planning around a British exit.
These concerns aside, the Conservatives can now build on the foundations established with their coalition partners since 2010. For now at least, the UK remains united and the markets have reacted positively.
The outcome of the UK General Election is likely a positive for UK equities, based on business-orientated policies from the Conservatives and the removal of uncertainty created from a minority or coalition government. However, the Conservative win brings with it many other risks.
The Conservatives have promised to hold a referendum on EU membership. We expect this will not happen until 2017, and do not expect there would be a vote to leave in any event. That said, the ambiguity about the status within the EU will create risks and possible delays of needed capital expenditure until a certain outcome is achieved. The storming success of the separatist Scottish National Party in the election will also raise the spectre of an independent Scotland once again. Finally, as the majority has turned out to fairly slim, this creates a substantial risk that there’s another general election before 2020.
The markets’ reaction to the Election result has been predictably positive, with the pound being the initial beneficiary. Gilt yields have also fallen on the prospect of more austerity and a lower deficit while shares are rising, unsurprisingly led by house builders, domestic retail banks and regulated utilities and outsourcing companies.
However, without wishing to throw too much cold water on the celebrations, we will return to “business as usual” very shortly, and there is the small matter of a promised referendum on membership of Europe to negotiate. It has long been our opinion that, at the asset class level at least, UK markets will be more affected by global than domestic trends and influences. This has been especially evident in recent days in the bond market, with profit-taking in German Bunds sparking extraordinary moves in all developed market bonds.
It is a similar story for global equities, where investors are grappling with the recent moves in currencies and inflation expectations as well as the jump up in bond yields. We don’t envisage this as being worse than a short-term correction, especially with the amount of liquidity being provided by central banks in Europe, Japan and to some extent China. We see further gains ahead for equities, but the summer promises continued volatility.
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