How should investors react following the Election?

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The recent surprise General Election result in the UK has given the equity market a short term boost, but how should investors react? David Cameron’s Conservative party won an overall majority at the election on 7th May. This was not anticipated by polls which had indicated the likelihood of a hung parliament and the probable need for another coalition.

The FTSE 100 Index jumped 2.3% the following day, led by sectors such as banks and utilities which had been seen to be at risk of tougher regulation or intervention under a Labour led coalition. The overall market move can be explained by the removal of uncertainty. Investors were concerned about weeks or months of political wrangling with no clear leadership, so removal of this risk explains the sharp positive reaction.

Furthermore, a continuation of the economic policies pursued by the previous Conservative led coalition is widely seen as market friendly as the UK economy has performed relatively well since the last recession compared to many European economies, although the absolute strength of this recovery has been lacklustre.

However one of the key risks with the new government is their commitment to an EU referendum by the end of 2017. Uncertainty about our eventual position in Europe may lead to reduce investment in the UK by companies, particularly multinationals looking to build up their European presence. Any reduction in investment could slow UK GDP growth and potentially impact UK corporate profits and the stock market. On the flip side a commitment to business friendly policies and a firmer push-back to certain European Union labour rules could be seen as positive for the stock market.

Within the equity market the sectors most likely to benefit directly from the Conservative election success fall into two broad categories. First, those sectors that were seen as vulnerable to specific Labour party policies. As well as utilities and banks mentioned above there were specific risks attached to bookmakers - controls on gaming machines, house-builders and estate agents – a possible mansion tax, and transport companies -greater control of buses. However the most affected sectors have already reacted so there may be limited further follow through. Second, sectors which are exposed to government activity and policy changes like construction and outsourcing could have been vulnerable to a prolonged period of uncertainty and inactivity which now seems unlikely.

Opportunities

  • Conservative Election success removes uncertainty and suggests business-friendly environment.
  • Sectors seen as vulnerable to Labour policies, e.g. banks and utilities may perform better.

Risks

  • Uncertainty ahead of EU referendum could slow investment into the UK and concern market.
  • The sectors most likely to benefit from removal of political risk have already reacted positively, limiting further gains.

You will find much more information about The Merchants Trust PLC on their website - www.merchantstrust.co.uk. As well as the latest performance information including fact sheets and daily share prices, you’ll also be able to watch a video of the board and managers discussing the trust’s history, read the very latest Stock Exchange announcements and other press cuttings of interest and download the most recent annual report.

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ajbell_simon_gergel's picture

Simon is Chief Investment Officer, UK Equities and is head of the Value & Income Investment Style Team. He manages The Merchants Trust PLC and the Allianz UK Equity Income Fund. He joined AllianzGI in April 2006 from HSBC Halbis Partners, where he was Head of Institutional UK Equities. At HSBC Simon was the portfolio manager of the HSBC Income Funds, with assets under management of £950million. He also managed a number of segregated institutional accounts. Prior to HSBC, Simon was an Executive Director at Phillips & Drew Fund Management Ltd (a subsidiary of UBS), where he spent 14 years as a portfolio manager with responsibility for £1 billion of segregated pension fund assets and also with direct responsibility for £500 million of UK equity assets. Simon graduated from Cambridge University in 1987 with an MA (Hons) Cantab in Mathematics. He is an Associate Member of UKSIP.