Opportunities on UK election uncertainty

For the second time in succes-sive elections, no single British political party is set to govern the country on its own. A hung parliament and coalition government is the likely scenario for the UK, but the make-up is far from certain.

Jeremy Lang, Ardevora

History suggests a Conservative government is more positive for markets in election years. In the nine years of a Tory victory, the market rose eight times, with an average annual return of 10.8%. In the eight years of a Labour win, the market only rose three times, at a -5.4% average return.

“It will be the most unpredicta-ble election outcome for genera-tions,” SWMC UK Fund manager Brian Cullen says. “This alone is bad for business. There will be investment deci-sions postponed solely to ‘see how things pan out’. Given a record current account deficit, EU referendum potential, and increasingly populist claptrap spouted by all the political con-tenders, it might seem sensible to take some risk off the table.

Cullen adds: “However, the fact that this is an increasingly common refrain amongst investors and brokers makes us think the risks are probably priced in already.” Jeremy Lang, the Ardevora UK Income Fund manager, typically does not care too much about the results of elections.

Uncertainty

“What generally intrigues us is the anticipation of uncertainty elections bring, which often throws up some interesting opportunities. This gets released once the election is over and people move on to the next thing to worry about,” Lang says. “Our only stocks not participating in the recent rally have been hanging back because of this anticipation of uncertainty over the elections. These are our positions in SSE and National Grid. “We are looking forward to the election finishing, as this anticipation of uncertainty will get crystallised and there will be an anxiety release. We believe both companies will then start to perform well once again.”

Evenlode Income Fund manager Hugh Yarrow is also unperturbed. “In our view the election will have a limited impact on the long-term fundamentals of the companies we invest in, where the operations tend to be quite global in nature. In our Evenlode fund, we do not invest in banks or utility companies, which are probably the two most sensitive sectors to the election outcome,” Yarrow says. Hermes Credit senior analyst Filippo Alloatti says manifestos will logically get diluted by a coalition.

Forecasting

“The economy has done better than anyone had forecast. Each side of the political spectrum is aware of the value of financial services, given its weight in the economy. Confidence is therefore crucial,” he adds. “The matters affecting the banks directly – such as liquidity, capital and leverage ratios – are already being dealt with. No matter the election result, most reforms are practically irreversible. In fact, banks as diverse as HSBC, Barclays and RBS have begun to pave paths towards the future, but regulation and conduct issues still loom.”