There is no happy outcome from the General Election for either the UK stock market or for sterling, investors have been warned. One political party winning a majority government is highly unlikely, meaning a rainbow coalition of opposing promises and considerable market uncertainty.
Speaking a pre-Election event, Bill McQuaker, multi-asset investor at Henderson said that the UK was in a “worse position than the Fragile Five economies when the taper tantrum hit”. These were the five economies of Turkey, Brazil, India, Indonesia and South Africa which saw their currencies plummet in value after then-Chairman of the Federal Reserve Ben Bernanke announced plans to taper US quantitative easing.
McQuaker said that without a stable UK government he expected sterling’s fate to be similar to those countries which saw their currency plummet in July 2013. For this reason, McQuaker said he favoured larger UK companies who would benefit from a weak pound as their revenues were mostly sourced overseas.
“I am concerned about the UK and where it finds itself following the election,” he said. “The two most likely outcomes have negative implications for the stock market. Either the Conservatives get the most votes but are unable to form a government, and so the party that takes over will not be legitimate. Or the Conservatives do win and Scotland will demand another referendum.”
Both outcomes create significant uncertainty – with a hotchpotch coalition it is unlikely any bills, reforms or laws will be passed in Parliament, and McQuaker even predicts social unrest in Scotland if the SNP gains 95% of the vote but is unable to have a political voice.
Should Investors Take Gains?
The last six years have been “tremendous” says McQuaker – for both equity and bond investors.
“This is the longest bull run of my 30 year career and as far as the S&P 500 is concerned the longest bull market since the second World War,” he said. “It is not just equities either; bonds have done incredibly well and are still running. This is largely due to extraordinarily helpful Central Bank policy – but this won’t last forever.”
McQuaker pointed to the example of the US which cut interest rate and instigated quantitative easing, resulting in economic growth and a record stock market rally. Europe in contrast raised interest rates in 2011, instigated austerity measures, failed to crack down on banking practises and as a result was in recession for far longer. Only now has Europe changed tack and as a result the Eurozone is forecast to grow 1.1% this year.
The UK quietly abandoned austerity in 2012 when the Government took the decision to balance the books over two terms rather than one, resulting in the domestic recovery and much sought for FTSE 100 high of above 7000.
Where are the Opportunities?
The threat of deflation is a redundant one according to McQuaker – if you strip out energy and food costs, inflation in the US and UK is largely running at target 2%. Employment in both countries has returned to pre-recession levels and wage growth has begun to appear.
These barometers, alongside healthy GDP growth, mean that the Bank of England and the Fed will soon be unable to justify current monetary policy and the flood of cash which has so supported equity and bond prices over the last five years will cease.
So how should investors react? Equities are still considered the most attractive sector but with UK political risk high, the US recovery well underway and Europe improving it may be time to look to emerging markets again.
McQuaker recently added the iShares MSCI Emerging Markets EFT to his portfolio for exposure to more cyclical emerging markets that are cheap, having been “beaten up” by the recent fall in oil price. He has sold off exposure to commercial property which did so well last year, and reduced the overall equity exposure following the recent six month rally – keeping a cash allocation ready to invest on market dips.
“There has been a build-up of consensus within markets and so we are looking for more value opportunities,” said Henderson fund manager James de Bunsen .
“Infrastructure looks too expensive, and catastrophe bonds do not compensate you for the associated risk so we are diversifying into renewable energy and private equity.”
