UK fund managers consider UK election

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The UK Association of Investment Companies, representing closed ended fund managers, has published comments from its members regarding the pending general election taking place on 7 May.

Current polls predict the election will result in a so called hung parliament, and perhaps event a minority government being forced to call for support on an issue by issue vote.

However, with the AIC’s UK All Companies sector trading on an 11% discount, the question has been put whether this represents a buying opportunity.

James Henderson, fund manager, Henderson Opportunities Trust plc, said: “Company results so far this year have on the whole been encouraging, with cash generation coming through strongly. Despite this strength in company results Henderson Opportunities Trust remains on a double digit discount as investors are risk averse ahead of the election – in our view this presents a value opportunity.”

Guy Anderson, manager of The Mercantile Investment Trust plc, said: “The upcoming general election may be hugely significant for the UK and the UK market, given the wide range of outcomes and potential implications for specific companies and industries. However, the election is just one of many factors influencing the stock market, and over the long term we believe that the underlying strength of the UK economy, the diversity of UK corporate earnings and a number of company specific drivers will support continued earnings progression. Given broader macroeconomic uncertainties and currently elevated valuations, we expect that overall market levels are unlikely to make more meaningful progress until we see evidence of this earnings progression.”

Rosemary Banyard, manager of Schroder UK Mid Cap, said: “Although we are not enthusiastic about the prices of stocks, they are undoubtedly cheap relative to government bonds, where yields are at extremely low levels. Such unattractive valuations of bonds might explain why equities have so far performed strongly since the beginning of 2015, but we also believe the bulls could be too sanguine about the economic outlook. As a consequence we are maintaining a net cash position in the Schroder UK Mid Cap investment trust.”

One of the key factors affecting the view of the UK is the fall in input costs associated with the falling price of oil.

Banyard added: “Real wages in the UK have been given a further boost from the positive effect of moderating inflation, as lower oil prices have fed through to the fuel pump. Supermarket food prices and clothes prices have fallen too, albeit the latter may be the result of temporary weather-related factors. Meanwhile, small and mid-cap companies with overseas earnings could well benefit from the relative weakness in sterling against a resurgent dollar. However, those companies exporting to the eurozone could be impacted by the strength of the pound against a very weak euro in response to the ECB’s actions.”

Anderson said:The reduction in oil prices since last summer is only now beginning to be felt by companies and consumers and this may lead to a dislocation in the performance of different sectors. We are incrementally more positive on consumer cyclicals where earnings growth should accelerate as a result of consumers experiencing real wage growth for the first time in five years. Conversely, we believe that the market is still underestimating the risks to earnings at oil producers and oil services companies, where existing hedging policies and contracts may be masking the underlying fundamentals.”

 

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