Investing under Boris

As the dust begins to settle on the general election, we bring you the thoughts of some of our investment managers on what the result means for how you should invest.
BlackRock

We see the UK entering a period of relative political stability for the first time in a decade. Johnson has political authority and flexibility but faces another difficult Brexit deadline: to negotiate a trade deal with the EU by the end of 2020 when the current Withdrawal Agreement expires. This is a tight timeframe, with end-2020 serving as another cliff edge leading to a disorderly exit on World Trade Organisation terms if no deal is in place. We see this as a risk but not our main scenario. That said, negotiating a trade deal will be difficult and could take many months to play out; uncertainty could spill over into the second half of next year. A large parliamentary majority will likely give him a freer hand to negotiate with the EU and make some concessions without materially changing what will be a relatively hard Brexit – leaving the single market and customs union. That should benefit UK goods more than services. The result in Scotland will be a source of tension and up pressure for an independence referendum, but we don’t expect this government to grant one.
David Page, AXA Investment Managers

The Conservative Party under Boris Johnson has won with the party’s biggest majority since 1987. A more Brexit-aligned Tory party with a large working majority should be able to pass the Withdrawal Bill to allow the UK to leave the EU on 31 January 2020. The manifesto pledge to “not extend” the transition period means the risk of a de facto no-deal exit at the end of 2020 will persist, continuing to weigh on investment. Fiscal easing should provide a lift to the economy despite ongoing Brexit uncertainty. However, the Tories have been unclear on how much easing they would undertake. Despite that uncertainty, we expect the UK economy to accelerate next year. We forecast growth of 1.2% in 2020, with sterling rising modestly as Brexit risks reduce.
Azad Zangana, Schroders

This general election brought a surprisingly strong victory for the Conservative party. We expect this to mean that the UK will leave the European Union (EU) as planned on 31 January 2020, under the existing withdrawal agreement. After that, trade, customs, and indeed everything else regarding the UK’s future relationship with the EU will need to be negotiated. Investors and economists will be hoping that the trade and future relationship talks take place quietly in the background, with the focus now shifting to the domestic agenda.
David Riley, BlueBay Asset Management

A Conservative majority of 80 surpassed the predictions of even the most ardent Tory supporters, with the Labour vote share collapsing on the ‘Corbyn effect’. We would emphasise that we will be witnessing the ‘End of the Beginning’ of the Brexit process, rather than an end to Brexit altogether – given the need to move onto the future trading relationship. Here there is an underlying risk that EU policymakers, who have been treading a conciliatory line towards the UK in recent months on the hope that the UK would decide to back ‘remain’, may turn more hostile towards the UK in coming weeks and thus raise a renewed no-deal risk later next year.
That said, the large majority which Johnson now enjoys should enable him more freedom in negotiations than would have been the case were he to have had a very thin majority, leaving him beholden to the hardline Brexiteers in the European Research Group. This hope for compromise and thus a softer Brexit may help sustain a more constructive tone around the UK for the time being and with fiscal easing likely to be confirmed – we believe it is unlikely that the Bank of England will now cut rates and we continue to look for gilts to underperform other global bond markets. With respect to the pound, we cut a long sterling position ahead of the election given the uncertainty in the run-up to the vote. We are not inclined to take a strong view on sterling in either direction for the time being.
John Betteridge, Rowan Dartington

Of all the outcomes, the international community will view this as the most positive and we would likely see increased fund flows into the UK and mid cap in particular, as this area of the market has generally been unloved and under owned by global asset allocators (BofAML Global Fund Manager Survey). Further strength in sterling would, nevertheless, be a short term negative for the UK’s larger overseas earners (due to the translation of overseas earning back to sterling) and this could be a drag on the relative performance of the often quoted FTSE 100 index. Given that all political parties have promised what one commentator called a bout of fiscal incontinence, it seems unlikely that interest rates across the curve should head anywhere but up.
Ken Hsia, Investec Asset Management

A Conservative majority had increasingly become the consensus view in the run-up to polling day, reflected in the gradual strengthening of sterling. While it introduces the least fresh uncertainty, the final Brexit terms and any trade deal with the EU remain to be established. Thus, while we expect a relief bounce in UK-centric companies that have de-rated to trade at a discount to the rest of Europe, we do not expect an immediate impact on incomes or corporate investment within the UK. We maintain our neutral portfolio positioning with respect to Brexit. Much of our UK weighting relates to multinational companies that derive most of their revenues overseas, although we do hold Lloyds Bank and Berkeley Group, the UK housebuilder. We believe both of these stocks are quality assets trading at a discount that should benefit from the incremental reduction in economic uncertainty.
Ian Lance, RWC Partners

Sterling has spiked against the dollar and a lot of our shares spiked too. We don’t make macro forecasts but I think it is safe to make a few observations. The market was worried about the economic implications of a Labour victory which would have probably been bad for the economy. As such, there will be relief this has been avoided.

• In terms of fears of the economic implications of a hard Brexit, one could argue the large majority allows Boris Johnson to become more moderate in his stance.
• Some have stated that a lot of investment has been put on hold as a result of the last couple of years on uncertainty. Clarity on Brexit may release this pent up investment which had been held back due to the uncertainty. In addition, there will be investments associated with some of the Tory policies (infrastructure spending). This will have a positive effect on companies likely to be involved and could be beneficial for the wider economy.
• A case can be made that the new government is likely to be business-friendly and pursue policies which could be well-received by the market
• At the very least, those companies at threat of nationalisation (Royal Mail, BT) will now have that threat lifted and the risk premium in the share prices will decline.

The fears alluded to above have above have driven investors out of UK equities with the result that they stand at a thirty year discount to the MSCI World index. The reduction in some of those concerns should cause that gap to close. Expect to see some allocation back to UK equities. One of the ways it may close is via mergers. US companies have the opportunity to take out UK rivals whose share prices are discounted and also get the benefit of the weakness of GBP against USD. It is quite possible we will see bids for UK companies. The fears of an economic slowdown have pushed investors out of domestic cyclicals like banks and retailers and in to quality growth like consumer staples and technology. It is quite possible that this will flip back in the other direction especially because market positioning is so lopsided ie investors seem to be underweight value and overweight growth.

• We believe there is a large bifurcation of valuations in the market with financials, retailers, energy and support services trading at very low valuations and quality growth trading at very high valuations which we feel is not justified by fundamentals
• We have seen that when that valuation dispersion becomes extremely stretched, it can move back together very quickly and we expect this to happen now.

A lot of investors have been hiding out in quality growth and have been reluctant to switch to value stocks until they saw a clear catalyst. It is just possible that this election could be the catalyst they have all been waiting for (although obviously we will only know this with the passage of time).

AXA, BlackRock, Bluebay, RWC and Schroders are fund managers for St. James’s Place.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The opinions expressed are those of the fund managers listed above and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.