WINNERS
Overseas earners
FTSE 100 companies deriving significant revenues from abroad have had a decent tailwind from the weaker pound since Britain’s vote for Brexit, and fund managers suggest this trend will continue.
Ryan Hughes, head of fund selection at AJ Bell: “Sterling has weakened as investors move away from the currency and this can be positive for some investments. Those investors who have exposure to overseas equities will have seen this last year following the Brexit outcome and closer to home, with the FTSE 100 Index being so reliant on overseas earners, this may be a place to look for returns.”
Nancy Curtin, CIO of Close Brothers Asset Management: “At this early stage, the balance of factors looks less supportive for domestic UK equities. In contrast, large cap UK equities, with earnings overseas, should continue to benefit from the currency boost to earnings provided by a weaker pound. This is where most of our exposure lies.
“Going into the election, we have been positioned underweight UK equities, with a bias within our allocation to overseas-exposed corporates. We will be evaluating the situation as it evolves. Times of uncertainty can create interesting stock specific opportunities as pockets of value often emerge. As multi asset class investors, our portfolios have broad exposure to global companies, many of which can continue to benefit from improved global growth and earnings expectations that have little to do with UK politics.”
Property and housebuilders
The housing market was a hot topic in election campaigning, and whoever ends up in charge will no doubt want to make sure it remains buoyant, while a weaker pound will entice more overseas investors to buy up expensive London property.
Adrian Lowcock, investment director, Architas: “Falls in the value of the pound could potentially be good for overseas investors into certain parts of the UK property market, especially London and larger UK cities which may lead to more overseas money chasing the market. This could also mean that there is a likelihood of potential rate rises moving further out which ought to be good for property in the short and medium term - lower financing costs and property continues to be attractive when compared to lower yielding cash and gilts.”
Old Mutual Global Investors’ head of equities Richard Buxton says he remains positive on the prospects for housebuilders in an environment of anti-austerity.
“At a sector level, we remain relatively optimistic on the prospects for the listed housebuilders. The most significant potential impediment to the sector’s continued progress had appeared to be a discontinuation of the Help-to-Buy scheme, of which there was no mention in the Conservative manifesto. As we enter an era of increasing anti-austerity, the scheme’s survival prospects may now improve.”
Michael Browne, portfolio manager for European equities at Legg Mason affiliate Martin Currie: “There has been little or no reported slowdown in enquiries for new houses, and any government will be very keen to at least keep that momentum, if not announcing further measures to help or accelerate building.”
Miton multi-asset fund manager David Jane: “We have a small holding in the housebuilders, where recent slower mortgage approvals and the election have caused prices to weaken short term, and the currently low mortgage rates and wider availability of high loan to value offers mean the background for volume remains favourable.”
Government bonds
The yield on a 10-year gilt has climbed following the election result, but fund managers suggest there are a number of difference forces acting on these bonds, so a more cautious outlook may be prudent longer term.
Mark Burgess, CIO, EMEA and global head of equities, Columbia Threadneedle Investments:
“Gilts have managed to retain their ‘safe-haven’ status through a number of political events in recent years, but non-residents currently hold just under a third of the UK government bond market and any reduction in international investors’ appetite for UK assets would constitute a risk to gilt valuations."
Miton’s David Jane: “We find little attraction in the UK government bond yielding less than 1 per cent, when inflation is over 3 per cent, which means there’s little in the corporate bond market offering a positive real yield either. In this area, we would rather consider the US where yields are materially higher and the era of QE is in the past.”
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment: “There are several conflicting forces acting upon gilts. Government bonds’ safe haven status will tend to be supportive during times of uncertainty, but there is also a risk that the fragility of the government is a disincentive to hold them, particularly for overseas investors.
"The apparent vote against a ‘hard’ Brexit and a second Scottish referendum is more supportive. However, the anti-austerity protest that also seems to be encapsulated in this result would suggest higher deficits and thus a greater supply of bonds, putting some upwards pressure on yields.
“Lack of political certainty and the threat of yet another election might also weigh on economic activity in general, particularly in terms of longer term investment. This would suggest a more benign environment for bonds. As long as the UK remains solvent, government bonds should continue to trade in line with global trends. There is no reason to expect the Bank of England to change its current monetary policy. In fact, the longer the uncertainty, the longer the status quo will persist.”
Adrian Lowcock, investment director, Architas: “Initially gilts may well rise on the news of a hung parliament as the asset class is seen as a safe haven for investors. Longer term though, we remain cautious this year as the willingness of international investors to finance UK debt will be diminished.
"In addition, rising inflation and expectations of future interest rate rises do not suggest prices will rise. However, given the current market valuations, it might not take much to cause a change in sentiment and if there is an economic growth shock government bonds will be one of the asset classes investors will seek to protect their investments. It is important to look beyond the short term impact of the election result when considering investing in an asset class.”
Pioneer Investments’ head of global asset allocation research, Monica Defend: “We consider the inflation linked bond market to be too dear, as it strongly benefits from the demand of local defined benefit pension funds due to current legislation; any change to this could put pressure on linkers. We prefer Japanese and European linkers.”
Gold
As a safe haven asset, gold might benefit from higher demand as investors look for somewhere to shelter from market volatility in the wake of the election.
Pioneer Investments’ head of global asset allocation research, Monica Defend: “We seek to manage potential spikes in volatility with hedging strategies and assets perceived as safe haven, such as gold.”
LOSERS
Sterling
Sterling is the obvious loser from political turbulence, although the immediate falls have not been as dramatic as expected. But, looking forward, the currency looks set to remain under pressure, and managers are considering ways to hedge the risk.
Miton’s David Jane: “Currencies remain a difficult area, as they can add so much extra volatility for little extra return. So, we have much of our overseas-dominated portfolios hedged back into sterling, particularly the bonds. With overseas currency exposure broadly diversified and at roughly 25% of the portfolios, sterling strength is a risk but unlikely to dominate returns. Broadly we think the UK now appears even less compelling compared to opportunities elsewhere. We maintain a low overall exposure but recognise that there are some good value situations available.”
Paul O’Connor, head of multi-asset at Janus Henderson: “We remain wary of exposure to the UK economy and retain a cautious view on sterling. While the currency has already fallen a long way, it is likely to retain a negative bias until macro momentum has stabilised and political uncertainly has eased.
“Perceptions of the Brexit process will remain the key driver of sentiment on the currency. The possibility of a soft Brexit holds the promise of a more constructive view on sterling, but the fog of domestic political uncertainly will need to clear before much faith can be placed in that scenario.
Charles Hepwoth, investment director at GAM: “Sterling has already registered the effects of the first shock wave from the election result, falling over 2% from yesterday. This will buoy FTSE large caps with their foreign earnings but will be negatively translated into domestic earners as inflationary pressures will continue to build. Expecting the unexpected is now de facto and we continue to be positioned in non-sterling assets, which will benefit our portfolios in the short term.”
Consumer stocks
Broadly speaking, consumer stocks linked to the domestic economy are likely to lose out compared to more internationally-focused businesses. However, some managers suggest there are tactical opportunities to be found.
RBC Capital Markets: “We view the prospect of a hung parliament as a short term negative for the UK general retail sector, although given a more muted reaction by sterling so far, nothing like as dramatic as following the EU referendum vote in June last year.
“In particular, we would see the election outcome as a negative for UK exposed businesses with high dollar sourcing costs. Discounters would also be particularly affected by any moves to increase further the level of the living wage and the sector by any reversal in the current government's plans to reduce the rate of corporation tax in the UK.
"Relative gainers short term would be ASOS and Kingfisher given their relatively high non-UK exposure. Uncertainty about government policy on items such as Brexit and the Budget will be unhelpful and probably be seen as a drag on consumers and businesses.”
“The result will be negative for UK assets such as commercial real estate and retailers,” says Martin Currie’s Michael Browne.
Miton’s David Jane: “There do appear to be some opportunities in the consumer services area, where expectations and valuations are very low despite the leading indicators remaining strong. Here we favour the pub and restaurant groups. In aggregate, UK consumer positions comprise one of our smaller macro themes as we’re able to find many attractive risk reward opportunities globally, particularly in the long term themes.”
Small caps
The smaller companies on the UK stock market are more closely linked to the fortunes of the domestic economy, although there could be value opportunities available now for those investors willing to take a long-term view.
Tom Stevenson, investment director for personal investing at Fidelity International: “Domestically-focused companies in the FTSE 250 and Small Cap indices face headwinds as sluggish domestic earnings and rising inflation deliver an effective pay-cut to British workers.”
OMGI’s head of UK equities, Richard Buxton: “Currency movements will inevitably have a significant bearing on the relative performance of the FTSE 100 and FTSE 250 indices. Weakening UK economic data have acted as headwinds to the more domestically-oriented small- and mid-cap markets. As such, although there remain pockets of expensively priced small- and mid-cap stocks, when viewed as a whole, the small- and mid-cap markets have been trading at cheaper valuations than their larger peers.”
Energy
Energy suppliers became a focal point during election campaigning, with both major political parties talking about introducing price caps on energy bills. OMGI’s Richard Buxton thinks things could get tougher for energy suppliers and other utilities, as domestic energy costs continue to be a source of political wrangling.
ONES TO WATCH
The impact on some other sectors of the market remains to be seen, depending on what kind of government is formed and what its priorities are.
Banks
RBC Capital Markets: “Assuming the outcome of a Conservative/DUP minority government we would expect a fairly benign impact on the UK banks sector. The Conservative manifesto included no real change to bank-related policy. The direct impact is more related to FX – HSBC, Standard Chartered and Barclays are beneficiaries of sterling weakness given dollar related earnings/dividends.
“One other key issue for the UK banks is the direction of interest rates, and one could argue that the uncertainty created by a hung Parliament could mean that rates remain lower for longer, so that pressure on net interest margin is not alleviated any time soon.
“Labour policies on the UK banks are very different to Conservative – such as a consultation on the break-up of RBS and higher bank levies and a stamp duty reserve tax and we do not see a likelihood of these even if the narrowness of the coalition majority may necessitate cross party deals.”
OMGI’s Richard Buxton suggest improvement in bank stocks will be deferred until interest rates rise towards more normalised, pre-crisis levels.
Healthcare
RBS Capital Markets: “With a hung parliament likely leading to more moderate policy changes we see a potential benefit to UK healthcare spend, but the UK is a small fraction of the global market so not as relevant as say the US. Corporation tax rates change, albeit some don’t pay tax…, but of those that do higher tax is negative for Consort, Clinigen, ConvaTec, Dechra and Vectura as each have a larger UK operation than Abcam, BTG and Indivior (smaller negative).”
Utilities
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment: “There is quite a sharp divergence in performance between overseas earners (up) and domestic cyclicals (down). There is also a nice bounce for the utility shares that were under threat of renationalisation.
“We view a Conservative/DUP coalition as thematically more favourable, as the threat of Labour introducing more punitive policies has for now receded. This could lead to a relative outperformance for the UK water and to a lesser degree, the Big Six energy suppliers.
Transportation
RBC Capital Markets: “If the UK election result is perceived to reduce the probability of a hard Brexit, beneficiaries would include Wizz Air and Ryanair. Other beneficiaries from this include Eurotunnel, easyJet and IAG, however, weaker sterling is a headwind for these companies. Companies that see translation gains from weaker sterling include National Express and FirstGroup, from their US operations. Immediate nationalisation risk may be reduced for Royal Mail and the bus and rail companies if a Conservative-led government is formed, but the election result is not likely to be seen as decisive in this regard.”
