Another election surprise
On the importance of EQ in politics, the volatility of reputations, and a return to two party politics: our initial response to the UK election result.
There are three stand out features of the 2017 General Election:
First, the benefit of having a high EQ: Jeremy Corbyn has it, Theresa May doesn’t. You may not like Corbyn’s policies but most people warm to him as a human being. In contrast May comes across as an unfeeling autocrat…
The second takeaway is the volatility of reputations. May started the campaign streets ahead of her party and even more ahead of Corbyn. However, those opinions were not deeply held. With more exposure the impression that May was a safe pair of hands was soon shown to be false while Corbyn came across as unfailingly polite even under intense media pressure. By the end their approval ratings were similar.
Finally, it’s a return to two party politics with the surely irreversible decline of UKIP and Labour benefiting from a new found desire to vote by the young. It won’t be five years until the next election but if possible the Tories will hold on until boundary changes take effect some time in 2018. Whether May survives for a while as Tory leader hardly matters for now.
Politically this election result is a bad outcome at the worst time. The country is split down the middle, not just Brexit vs. Remain but also Financial Austerity vs. Big Government Spend. Forging a majority of both those groups will be nigh on impossible. Meanwhile, the Article 50 clock ticks on remorselessly.
Although many people today are suggesting that a ‘soft Brexit’ is now more likely, we do not agree. Hard core Tory Eurosceptics would rather see the Government fall than tolerate any weakening of the position on immigration and the European Court of Justice. So the hands of our negotiators are tied – even though they clearly do not have a mandate for a hard Brexit. If they did have more freedom, it would be political suicide to cave in and accept a massive exit bill and other restrictions ahead of yet another election.
On the European side there already seems to be acceptance that it’s simply a question of ‘when’ not ‘if’ the talks break down. This is a real problem for any company transacting significant business in Europe and also for those trading with other countries where we currently make use of EU treaties. Investment by businesses will be smaller than previously expected, with a negative impact on UK growth.
It’s also likely to be negative for consumer sentiment, although this is harder to predict. People could decide to drown their sorrows!
In terms of UK policy the government will have very little flexibility. There might be a bit more spending than previously expected but we don’t see this as a major issue.
What does all this mean for investment prospects?
So far it’s been muted. On the global stage the UK is a pretty minor player these days so the impact there will be negligible. Sterling has weakened, thereby providing an immediate paper gain for UK holders of overseas assets. We think sterling is already discounting a fair bit of uncertainty and while it will inevitably be volatile we don’t feel it is overvalued now.
The FTSE100 these days is mainly an index of multinational companies, so it goes up when sterling goes down and that’s what’s happened so far. Domestic companies are much more important in the FTSE250. EQ portfolios have been underweight to UK equities; our Balanced portfolios typically have less than 8% invested in UK companies with a domestic focus.
We’d expect a bit of a negative impact on commercial property: demand from tenants may weaken and yields could rise a bit. However, most of these funds are currently holding large amounts of cash so we don’t see a need to make any portfolio changes.
UK Gilts could be vulnerable if a high spending Labour government is seen as a possibility. However, we have only negligible exposure to gilts as we’ve felt for some time that they are over-valued.
Overall, we are confident that our widely diversified portfolios are well positioned. As ever, if you have questions or concerns please do not hesitate to contact us.