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Shoes on ground

Stable ground

07 July 2015

A more predictable political landscape should be good for UK companies believes Chris Reid of Majedie Asset Management.

Going into the UK election it seemed to all commentators that we were set for a hung parliament. This in turn implied the bearish scenario of political balance in the UK being held by nationalist parties such as the SNP, Ulster Unionists or UKIP, or again by the Liberal Democrats.

In the event – and we are, of course, generalising here – the reasonably emphatic outcome seemed to be due to the swing factor in Liberal Democrat voters. It seems that the less committed – or more moderate – voters who opted for the Liberal Democrats in the last election, more or less opted to completely give up on that course of action. As a result, and with the exception of the vote on Europe which is not until 2017, we are now likely to have a pretty clear field of view in UK politics for the next five years, given the legislation requiring UK governments to have a five-year fixed term and a relatively unchanged list of key ministers.

Corporate confidence

We believe this result is a very positive thing for individual stocks in the UK market because, regardless of one’s view on politics, a relatively predictable and reasonably rational political landscape is obviously important for an individual company as it plans its business for the long term. Now, when we look at an individual company, we can probably assume some semblance of stability around it; providing the business model is not set up to lose customers via blatantly bad pricing or services.

When people say that UK stocks have had their day, it is time to look further afield, and perhaps to Europe where rates are low and money is flowing, we would reply, “Which would you rather be: a Spanish, Greek or Portuguese company; or a French company, with elections looming and a possible lurch to the right or left; or a UK-listed company with a good five-year run at getting the strategy right?”

Now this is not to say there are no changes likely to come in the next five years. The more polarised UK political environment arguably reflects long-term structural inequality, and clearly this needs to be addressed and ideally resolved. In addition, there may still be a lot of policy changes which impact specific sectors, such as utilities and pensions. It is also the case that the UK is still running a scary deficit and it is hard to see how this can be closed without some combination of greater austerity, inflation and/or growth and, surely, a rise in interest rates.

Careful steps

So, one has to be careful as one tiptoes around the UK market; and while we think the UK election result is potentially great news at the individual company level, it is not necessarily a good thing for the wider UK market index. And on that note, one change we have implemented is to switch most, but not all, of our UK retail holdings into UK domestic banks – taking the view that the relative valuation justifies such a shift, while also feeling there are unarguable signs of strategic clarity and progress emerging in previously serial disappointers such as RBS.

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

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