Electoral investing – Rowan Dartington’s Stephens comments
Political jousting and regulatory uncertainty mean banking and energy sectors are unlikely to deliver the best returns until next year, says Rowan Dartington Signature’s Guy Stephens.
The stock market has always been a fascinating blend of varied influences. Fundamental company analysis, macro-economics, human behavioural science, natural events and politics constantly remind us of their importance and serve to surprise, making investing a constant challenge which can be hugely rewarding and extremely frustrating in equal measure.
As we approach the next UK election, most likely in May 2015, it is becoming increasingly apparent that several sectors of the equity market will have a political cloud of uncertainty hanging over them. On 25th September last year, Ed Miliband announced his ideas on energy price caps, and since then Centrica and SSE have underperformed the equity market by 20% and 17% respectively, up to the end of last week. Having observed the difficulty this created for the coalition, who can’t agree on their position, allied with the appeal to voters, he announced another potential vote winner in the form of banking competition in a speech last Friday.
The big five UK banks account for 85-90% of all current accounts and corporate lending, although there were in fact 154 incorporated in the UK as at the end of February 2013, according to the then FCA. Compare this to the US, where there are over 20,000 banks, and it would appear that Ed Miliband has a fair point regarding lack of competition and that the big five are still too big to fail. Mark Carney has entered the fray by disagreeing with Miliband’s stance, which has itself been criticised as the Governor of the Bank of England has historically tended not to express an opinion on political policy, especially ahead of an election.
The rumours of Miliband’s announcement on Friday started earlier in the week and his speech didn’t disappoint. As a result, over the week, Lloyds and RBS Group underperformed the broader UK equity market by 1.4% and 2.0% and are losing further relative ground as I write. This introduces unhelpful uncertainty for HM Treasury as they look to place a further stake in Lloyds and float off TSB and Williams & Glyn’s. This also perpetuates the uncertain regulatory environment which has restrained competition in the sector ever since the credit crisis took hold. No business is going to invest in a sector if the regulatory goalposts are not firmly planted in the ground, and are subject to movement as part of political jousting and the outcome of the next election.
As we have seen with housebuilders, political economic policy can be highly rewarding for the investor, but we suspect the banking and energy sectors will be subdued and unlikely to deliver the best returns now that they are firmly ensconced in political debate until the middle of next year.