Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Jan Luthman, co-manager of the Liontrust Macro Equity Income fund, gives his views on how the General Election will affect the stock market.
We are now less than three months away from a General Election that is expected to be one of the most closely fought in the post-war era. As the Election draws closer, and politicians ratchet up their populist rhetoric, the uncertainties and their possible impact on investment markets are likely to cause rising investor discomfort. The Election and any changes in government policy, however, can also benefit particular companies and sectors.
The General Election is one of the biggest influences currently on our radar. Here is a summary of our thoughts on which sectors and companies are likely to be among the winners and losers in the UK and globally in the current political environment.
Avoid Utilities
The increasing costs of incorporating growing proportions of “renewable power” into electricity supplies have, so far, been passed on to consumers. However, with consumers greatly outnumbering shareholders, it was no surprise to us that, in an election year, Ed Milliband should choose to shift some of these costs from the latter to the former by promising to freeze energy prices if he were elected.
More recently, the Public Accounts Committee has expressed considerable concern over who should pay for the £375bn that UK power utilities claim must be spent on upgrading and redeveloping power distribution infrastructure.
With both main parties committed to reducing the deficit, with pricing to consumers a very hot political potato and with balance sheets already carrying a lot of debt, the possibility of new share issues by energy companies has, in our view, raised a storm-warning cone that shareholders would be wise to observe.
The possibility of interest rates rising after the election following the re-emergence of wage growth and a weakening Sterling in our view provides further grounds for caution.
Invest in Asset Managers, Wealth Managers and Pension Providers
The far-reaching changes to the pension market announced in Chancellor Osborne’s “Saver’s Budget” in March 2014 provided good reasons to own a sector underpinned by compelling, long-term themes.
We believe the fund and wealth management sectors will benefit from rising equity markets and from long-term demographic support as the 48 to 64-year-old age group, which is a key driver of savings and investments, expands significantly.
Avoid Incumbent High Street Banks
We are disenchanted with the outlook for the large, high street incumbent banks whose fortunes we believe are being driven by political and regulatory imperatives rather than free market forces.
These incumbents also face a shrinkage in market share and margins in the retail and SME (small and mid-sized enterprises) space as competition grows from smaller challenger banks and through new forms of payment and finance.
Invest in Challenger Banks
The political hostility to incumbent banks is in stark contrast to the encouragement being given to the establishment and expansion of new, smaller, “challenger” banks. In particular, political support is being given to the expansion of lending to employment-creating SMEs.
Invest in Global Healthcare
We see a profound shift in political awareness of the vital importance and extreme fragility of global health. This is both a UK and global phenomenon.
In particular, events such as the outbreak of Ebola in West Africa suggest that new means of funding the protection of global health are being found, out with the budgets of national health bodies.
Rising concerns over the global implications of other diseases, and worries over increasing antimicrobial resistance, suggest that global imperatives may open up a new field of growth for the pharmaceutical industry.
Avoid Tobacco
The tide of opinion in emerging markets – the growth engine of tobacco companies’ business over the last decade – seems to be turning in favour of anti-tobacco legislation.
In developed markets, “stick” volumes have come under pressure from government health campaigns, the spread of smoking bans in public places and, most recently, the introduction of a ban on cigarette branding in some markets.
Growth in “vaping” appears to be a function of switching within existing markets rather than an expansion of a new one. Given the much lower threshold of entry – as there is no need for vast tobacco farms, we question the sustainability of current margins.
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