6th May 2015
A quarter of investors say they are likely to increase their exposure to the UK market despite uncertainty surrounding the general election tomorrow, a new poll reveals. Here the experts share their views on what the outcome of tomorrow’s vote means for investors…
The poll by Fidelity Personal Investing found that only one in ten investors say they may reduce their investments in the UK market.
Tom Stevenson, investment director at Fidelity, says: “It is often said that markets dislike uncertainty but the survey results show investors are remarkably relaxed about the outcome of tomorrow’s ‘too-close-to-call’ election. This goes some way to explaining the market’s recent resilience in the face of opinion polls showing the two major parties neck and neck.
“Wide discussion of the many different possible outcomes means that investors are unlikely to be too surprised on Friday morning when markets open. Although a market wobble remains a possibility during the negotiations to form a government, so too does the opposite – a relief rally.”
UK equities remain strong in the face of uncertainty
Peter Toogood, investment director at City Financial, says: “It is very difficult for even veteran pollsters or political observers to make a prediction on the outcome of the General Election tomorrow with any degree of certainty. This is, of course, partly due to the rise of minor parties’ poll ratings and their unpredictable impact on the main parties’ vote shares in marginal constituencies. Will the Greens take key Labour votes? Or will UKIP take crucial Conservative votes?
“This lack of certainty is key. The only factor on which we can place a high degree of probability is that no party is likely to achieve an overall majority. More than one ‘minor’ party may very well be needed to support – or at least not to oppose – the next government. This means that, as in 2010, we are likely to enter a period of political limbo as the party leaders try to form a government. The limbo period could easily be complicated by weakness in the leadership of any or all of the three main parties and the risk of a change in personnel that is not conducive to swift decision-making.
“Against this backdrop, it is very surprising that the pound appreciated so strongly against the US dollar last week and that UK equities have endured such a strong period of outperformance relative to global indices. In our view, the likelihood of a period of post-election uncertainty – and the fact that Labour appears to have the upper hand in forming the next government at this stage – makes UK markets vulnerable to a correction relative to their global counterparts.”
Election risks have already been priced in to sterling
Christopher Mahon, investment manager at Baring Asset Management, says: “Given our 12-18 month outlook we have been thinking about the impact of the election for some time. We have for a while had a large USD position in the Baring Multi Asset Fund to balance the risks that sterling would fall as the Election drew closer and more people worried about the result. This has, indeed, been the case, and GBP has fallen significantly. Consequently we have already taken some of our profits on this position, and reduced our USD exposure. This has been well timed given that over the past few weeks there has been a sharp increase in the GBP-USD exchange rate.
“We do not think a repeat of the falls to sterling in the run up to the Scottish independence referendum is likely. Back then, many investors had not taken the vote seriously until the week before the election and GBP fell sharply in the days before. By contrast, the General Election is something that has received extensive coverage in broker reports and commentaries. Consequently more of the election risks were priced in at the lows of c. GBP1.48, down from 1.72 last year. For this reason Barings reduced its USD weight from c. 14% to c. 5%, taking profits at the same time.”
James Spence, managing partner of Cerno Capital, says: “The UK will [soon] have a new government in place (or perhaps we will not). Irrespective, we have the sense that markets are beginning to peer through May 7th into the painters box of different political hues in combination. If the pound had been riding high on the wave of excellent employment and wages numbers, then we might commend a more judicious hedge. But it has not and there is some reason to think that, at 1.50ish versus the dollar, the short term outperformance of the UK versus the US economy has not been reflected, being somewhat impeded by the politics.
“Geopolitical analysts and The Bank Credit Analyst argue that Lab/SNP is pound positive as they will not offer a vote on Europe.
“Across the channel, Greece’s romantic interlude with the far left is approaching its reckoning. Ultimately, the hard numbers will have their say and these point decisively to default. Some say this is a problem, some say not, but how can these things be spoken of with any certainty?
“Where is value? In the places you’d rather not go: Russian energy, Chinese banks, Greek bonds, post default, probably. The key skills are increasingly behavioural. As a consequence, we are paying more attention to market balance, participant commitment and sentiment than ever before. The low volatility of markets is akin to the slow creep of morphia through the system. It feels good for a while but it’s the devil’s own doing.”
Markets may be unphased because of the prospects of lower interest rates
Rowan Dartington Signature managing director Guy Stephens says: “We have all heard of Black Monday which referred to a tumultuous day in 1987 when stock markets fell by more than 20%. Well, the day of the election result is being called Fall-out Friday in some curious media expectation that the outcome is going to surprise the markets. It is unclear whether this is an apocalyptic nuclear reference, an anticipation that the market will ‘fall out of bed’ or that all the political parties will intensify their squabbling.
“Markets are well aware of the likely political mess that we are going to be presented with on Friday morning. The only likely surprise would be the return of the Tories either in majority, minority or coalition and this would most likely be viewed as a positive event by the markets, due more to the familiarity factor rather than anything else.
“The downside vulnerability is more likely to occur the following week when all the deal-making jostling will begin if we have a hung parliament. A Tory, Lib Dem, DUP coalition would be easily the most market-friendly outcome, although concerns would then start building with regard to the certainty of an EU referendum and the impact this will have on economic investment in the UK and the value of Sterling.
“Any Labour coalition is going to have to involve the SNP and appears to be a very uncomfortable pairing reigniting the Scottish Referendum issue. Indeed, most SNP voters will have switched from Labour but their actions will have resulted in a Labour majority – maybe that is a price worth paying for an element of power and influence in Westminster to promote Scottish interests?
“Whatever the outcome, both options do little to attract overseas investment to the UK and this has shown itself in the currency markets where Sterling has been weaker. This may also be affecting the GDP number which came in at 0.3% for the first quarter, the weakest in three years, with construction particularly affected – this is logical as most projects are longer term, require an investment horizon and a stable outlook. The likelihood of a hung parliament will do little to support this.
“However, if we are looking at an outcome which does little to help the UK economy, we are less likely to see any interest rate rises and that is good news. Maybe this is why the markets are relatively un-phased as the real world of corporate profits, cash-flow and dividends will be unaffected in the immediate term and the accommodative liquidity environment further extended. Weaker GDP in the US has also led to this conclusion with the first rate rise now moving further out once more.
“The two weeks following the last election in 2010 did see a fall of over 6% in the equity markets as the coalition was fleshed out and those were relatively benign negotiations compared to what may transpire this time. Casting back to 1974 and the election of the Harold Wilson minority government, this occurred because Edward Heath and the Tories were unable to agree a coalition with the Liberals, having won the most seats. A second general election occurred in the autumn of that year, resulting in a narrow Labour victory.
“If we get a minority government or anything that resembles a Lib-Lab pact, this is likely to have a very short shelf life as the Tories and the SNP create havoc and we have political paralysis. A decisive outcome or a stable coalition is the best outcome for the country, the economy, the currency and ultimately the markets. Let us hope we wake up on Friday morning with a result where we can see a workable solution and not one where we limp along to another election.”