Political risk is rising up UK fund managers’ agendas as the possibility of a change of government in 2015 looms large.
Financial markets hate uncertainty, particularly when there are significant implications for future profits and dividends. The absence of a stable regulatory background around which businesses can make important investment decisions means these are increasingly likely to be deferred or cancelled.
Small wonder, then, that Labour leader Ed Miliband’s promise that a future Labour government would intervene to freeze energy prices sent a shiver throughout the fund management industry.
The general consensus among fund managers contacted by Investment Adviser is that, without new investment, the risk of power shortages, black-outs and substantial spikes in energy prices are highly likely.
Jan Luthman, co-manager of the Liontrust Macro Equity Income fund, dismisses most politicians’ pre-election, populist promises as “short-lived whimsies”, but regards Mr Miliband’s declared intention to cap energy prices as potentially deeply damaging to the economy.
Michael Clark, manager of the Fidelity MoneyBuilder Dividend fund, says the possibility of any government meddling in the energy market is definitely a concern. “There has to be some acceptance from all political parties that the lights have to be kept on,” he adds.
Martin Cholwill, manager of the Royal London UK Equity Income fund, says: “It is difficult for energy companies to know how to respond to [the threat of a price cap] effectively. They face rising costs from various green initiatives, for which the consumer is paying by way of higher prices. An inability to pass on these additional costs via price rises risks a squeeze on profits. Centrica earns a good profit margin on its energy supply business, given that it effectively has little capital employed.”
Rathbone Unit Trust Management chief investment officer Julian Chillingworth has decided to take some money out of the water sector, adding that energy firms SSE and Centrica “will be in the cross hairs of the government and the opposition”.
He adds: “We’ve already seen the government have a first swipe at the gaming industry and it is having ongoing conversations about fixed betting terminals. Banking is very much in the regulatory eye and we currently don’t own any banks, due to profitability and regulatory intervention.”
More broadly, fund managers also fear the gaming industry, banking, insurers and tobacco companies will continue to be vulnerable to political interference.
Schroders’ Philip Matthews – while not making specific moves in his UK Alpha Plus fund – highlights “political noise” as a headwind for UK markets in the coming months.
“From a UK standpoint, one headwind [for markets] is political issues – the extent to which politicians are getting in the way of the outlook for certain sectors, whether in energy, utilities or gambling,” he says. “We’re moving into a period where the election is not that far away so political noise is going to increase over the next year or so.”