Asset managers react to UK election result
With the final results of the UK general election largely confirmed, the asset management industry has responded positively to the Tory victory.
Christoph Riniker, head Strategy Research, Julius Bär and David Alexander Meier, senior economist, Julius Bär
“Incoming results of yesterday’s general elections are unveiling some surprises: Incumbent prime minster David Cameron of the Conservatives (“Tories”) seems to be able to maintain the power. Not only that, even the widely-expected scenario of a “hung parliament” is not yet certain, as a majority is still in possible for the Tories. This comes due to surprising weakness of the Labour party, which seems to have been devoured in Scotland by the Nationalists (SNP), it’s left-wing rival. As of the time of writing, the Tories have grasped 260 of 650 seats, while Labour is left at 213, with 90 seats still have to be counted and 326 needed for a majority.
“The SNP for its part is becoming the 3rd largest party with 55 seats, replacing the Liberal Democrats, which literally are being wiped out and have so far only won a mere 7 seats. A loser has also been the UK Independence Party (UKIP), which won only one seat so far, as the fist-past-the-post voting system prevented a lager fraction. Other parties are currently sharing 21 seats. After the final results the Tories will celebrate, even if coalition building will be on the agenda due to a hung parliament. We do not expect the defeat of Labour to bring back pound strength. The large SNP delegation and the Tories’ election promise, the EU exit referendum, keep political risks elevated.
“Generally speaking it is the shift of the political landscape which is complicating the situation. Over the past five years, fragmentation has increased, with smaller parties gaining importance, such as the UK Independence Party (UKIP), the Scottish Nationalists (SNP) or even the Greens. Decisive could also be the performance of the Liberal Democrats, last time the third-largest party and preferred ‘bride’ for the Tories. This situation will make it more challenging for the Tories to govern in the future. Based on the status quo, Tories and Liberal democrats currently reach exactly the majority, nothing more. Building a coalition always means that the Tories have to make concessions, offering the smaller parties considerable bargaining powers. However, based on the current situation the risk of near-term re-elections (as outlined in earlier publications) has clearly diminished” the Julius Bär team argues.
Fidelity Worldwide Investment
Dominic Rossi, Global CIO of Equities:“Whilst the constitutional issues raised by the election result will cast a shadow over Westminster, markets will be relieved that a likely conservative majority will continue with its fiscal consolidation policies combined with a competitive corporate tax policy. We expect equity markets and the FTSE 100, which surpassed a record high in April, to continue to trend upwards.”
Andrew Wells, Global CIO of Fixed Income: “On the face of it the swing to the conservative party, and the possibility of a majority, albeit slim, will probably be positive for both Sterling and Gilts. However as the dust settles the change in Scotland will have to be closely followed. Whilst the Scottish Nationalists did not campaign on a ticket of devolution, the magnitude of support for them must herald change in the future, and this will cause greater uncertainty. The other danger is that a slim majority, with no significant coalition could always see us back at the polls in a short period of time and markets will be wary of that situation.”
Stanhope Capital’s CIO Jonathan Bell
“Much to everyone’s surprise it looks as though David Cameron and the Conservatives will not only return to power, but do so without the need of a coalition partner. David Cameron has vowed to bring the UK together after last night’s election victory, but the four parts of the Union are politically divided. The DUP dominate in Northern Ireland, the Labour Party in Wales, the SNP in Scotland and the Conservatives in England. The case for devolving more powers across the Union looks strong and will continue to be discussed in parliament.
“As far as markets are concerned the result is good news; UK equities, bonds and the pound are all up this morning. Longer term, David Cameron may find that it will be harder to govern with a slim majority than it was in a coalition. The whips will need to keep whipping to keep maverick MPs in step and as time passes future bi-election losses are likely to weaken the majority over the life of this government. For financial markets this is not necessarily bad news. Investors generally dislike the consequences of governments with large majorities and active legislative programmes. We prefer stability. It is much better to have a government unable to write lots of new legislation than one that creates uncertainty and thereby discourages investment.
“The real story is the economic outlook. On the positive side the economy is growing and unemployment falling; on the negative, the UK still runs large budget and trade deficits and has poor productivity growth. With this economic background bond yields will remain low, but are unlikely to fall further. The equity market already discounts a continued recovery in corporate earnings and will be more affected by what happens in the rest of the world than here. Sterling is likely to fall further against the dollar as US interest rates start rising later this year whilst remaining strong against a euro deliberately weakened by quantitative easing.”