“None of the above” – Psigma Investment Management on Election 2015

27th April 2015

If you hadn’t noticed, there is an election coming up in the UK and it is already getting seriously boring Writes Psigma Investment Management chief investment officer Tom Becket…

I am struggling to believe there is still nearly two weeks of bluff and hyperbole still to go and even then the noise is unlikely to die down, as the warring factions try to cobble together a coalition. The temptation to follow the lead of Monty Brewster in the cult ‘80s film “Brewster’s Millions” and “vote for none of the above” is growing.

Sadly, despite my growing political apathy and the centralisation of both main parties’ policies it is a hugely important election for the UK economy, as it comes at a time when the global economic outlook is uncertain and the world continues to stumble away from the financial crisis.

It is right as investment commentators we stay apolitical, but we did warn from an economic standpoint that the 2010 election was one to lose, as the economic tasks ahead were so challenging. We reiterate that view this time around; from an economic perspective the structural issues plaguing the UK should not be brushed aside and ignored, despite the undoubted and welcome cyclical boost to growth that we are currently enjoying. Any new chancellor will have to tackle the teetering debt pile, as well as trying to close the fiscal and current account deficits.

For all of the sensible policies enacted by the incumbent administration, there is little doubt that the claims of austerity are fanciful. Indeed, one can examine the economic policies enacted since 2012 and recognise clearly a volte-face taken by the half-way through their term, which has borne economic fruit, but come at the expense of fiscal rectitude. In short, the government recognised their initial approach wasn’t working and took an easier path.

For the parties of the left to claim that the Tories are “slashers” and cold-hearted penny-pinchers is frankly total nonsense. Moreover, whichever party has the misfortune of assuming power will have far greater decisions to make over spending in the remainder of this decade. Indeed, given some of the ludicrous suggestions put forward by all hopeful parties in their manifestos, we are hoping for an extraordinary phase of collective amnesia in the post-election years.

The forthcoming election has rightly been depicted as the most uncertain in decades and the chances of a clean and decisive outcome are low, meaning that UK asset markets could well be volatile in the immediate aftermath. Nerves have already started to spread through currency markets, with the pound notably weak against the dollar and starting to soften against the yen.

There is a high chance that volatility across asset markets will persist, particularly in the aforementioned currency markets and we are surprised by how becalmed the government bond market has been, given the potentially unsavoury outcomes that are possible. Were an SNP and Labour coalition to secure power, we believe that could be a major negative in the eyes of international investors and we are deliberately underweighting UK Gilts, as there is little compensation for the risks of international capital flight. In fact, yields are so low that there is precious little compensation whatever the outcome of the election. This has implications for other assets linked to the UK gilt yield, such as investment grade corporate credit, which also currently offers scant future return.

An outright Conservative victory might not be the blessing that some have imagined for markets, given the close nature of opinion polls on a European referendum and recent comments from HSBC over the uncertainty that a “Brexit” might bring have caught the eye. Of course, such deliberations are unnecessary for now, but the key point is that there seems unlikely to be any perfect outcome for markets to the election, although we certainly believe that either a Conservative majority or a continuation of the status quo ante ConLib coalition would be favoured by markets – and probably looking at the maths the most likely outcome.

But does the election really matter for UK investors? The answer is both yes and no and there is also ambiguity over whether each of the myriad of outcomes are potential negatives or positives. If your view is like ours that sterling is likely to be a weak currency in the coming years and the UK domestic economy faces structural challenges, then it makes sense to primarily focus your investment attention overseas.

Notably, our portfolios are currently more internationally-focussed than they have been in eight years, reflecting the unattractiveness of UK bonds and our currency. We do like UK equities and moved back to a neutral stance late in 2014, following two years of underperformance, but that is less of a call on the UK itself, than a view that on a relative basis UK-listed companies are attractive. An improvement in UK corporate earnings, low levels of investor positioning and attractive relative valuations could easily lead to a continuation of UK equity outperformance in the years ahead. Moreover, weakness in sterling often translates into good UK equity market performance.

To sum up, we do not have a strong view of how the forthcoming election will play out, but we believe that a continuation of the current coalition seems likely and that will be initially taken well by financial markets. However, we should all recognise that risks aplenty remain for the UK economy in the coming years and the next government has a major economic challenge on their hands. Fortunately as global investors we can worry less about the UK from an investment perspective, which leaves time for us to fret over taxes, pensions and whatever great idea the politicians have next.

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