InvestmentsDec 23 2014

MM UK outlook 2015

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

The past 12 months have been profitable for investors in the UK, and 2015 looks set to continue that trend. While the UK economy and UK stock markets are different entities, the coming year may mean both affect each other.

During his Autumn Statement, chancellor George Osborne announced that the Office for Budgetary Responsibility (OBR) had revised up its forecast for real GDP growth in 2014 and 2015, but revised down its growth expectations from 2016 onwards. It forecasts 3 per cent growth in 2014, followed by 2.4 per cent in 2015, 2.2 per cent in 2016 and slightly above in the following years.

The general election, to be held on 7 May, looks set to be a major factor for investors in the UK. It could heavily impact the growth of the UK market in 2015, and James Carrick, economist at Legal & General Investment Management, thinks the economy will be excellent in the run up to the election, but there may be issues afterwards.

“The worst case scenario is a hung parliament – people don’t like uncertainty or where there is no clear majority,” he says.

“I think the worst case will be if the Conservatives are the largest party, Ukip makes a lot of gains and they are reliant on Ukip to form a government.”

“The cost of that would be an immediate referendum on EU membership. Because we don’t know how people will vote on that – we saw with the Scottish referendum that support at the start was very low, and then the final day got up to 50/50. The bargaining with Ukip would be a referendum on EU membership,” he adds.

Both Labour and the Liberal Democrats parties oppose any policy granting a referendum – to be held in 2017 if the Conservatives win the next election.

James Henderson, manager of the Henderson UK Income & Growth fund, believes elections are usually a concern for the city. “A Conservative win would be beneficial to the stock market, but this time around because of the European Union, it is more of a worry.”

“I think a lot of bigger businesses will want to see the UK leave the EU and anything that creates that uncertainty in an area means people’s capital spend programmes may be put on hold,” he adds. “That said, the underlying economy and global economy are growing and I think continental Europe is not as weak as people have been suggesting.”

Interest rates have also been a topic of great discussion over the past 12 months, and going forward the question will be when, rather than if, they will rise. The political outlook may be heavily influenced by the Bank of England’s decisions, so the outcome of the election could have some bearing on when they will rise if they have not already by May. The bank rate has remained at 0.5 per cent since 2009.

An early short-term rate rise could prove to be a “huge risk” to the UK economy, according to the British Chambers of Commerce (BCC). It said that because the UK is so dependent on consumer spending and mortgages, the UK economy could be particularly sensitive to any changes.

Elsewhere, the Consumer Prices Index (CPI) has been growing.

Recent figures from the Office of National Statistics (ONS) show CPI fell to a 12-year low of 1 per cent in the year to November 2014, down from 1.3 per cent in October.

Mr Carrick thinks consumer demand is going to go from strength to strength and as such the biggest concern for the UK next year will be trying to get a booking at a restaurant. He adds this is the best environment for an election.

While the UK could start off positive, it is also possible that after the election, there could be some market uncertainty, resulting in short-term volatility.

The uncertain coming 12 months may mean investors must keep in mind the fund manager favourite phrase of “cautious optimism.”