M&G Fund Manager
Post UK Election Webcast - Friday 9th June 2017
Jim Leaviss (M&G Head of Retail Fixed Interest):
- Most likely outcome is a Conservative & DUP coalition, gives May enough to govern but not enough to get things done.
- Therefore, another general election later this year is possible.
- The result makes a softer Brexit more likely.
- Noticeable was that 72% of young voters turned out to vote (far more than for Brexit or in 2015) and they have strongly supported Corbyn.
- Therefore Corbyn has momentum which puts him in a much stronger position for the next election.
- Immediate threat (i.e. next 2-3 years) of another Scottish independence referendum is removed.
- The main impact has been on sterling but not that dramatic – falls of up to 2% against US$ and Euro.
- £ looks cheap (around 10-15% cheaper compared to other currencies)
- View that currency markets believe risk of a harder Brexit is reduced.
- Gilts and equities largely unchanged.
- UK growth was beginning to fade anyway going back to the start of 2017.
- Real wage growth is reducing which is very important for UK’s consumer led economy.
- View that BoE will “sit on their hands” for the foreseeable future – no rate rises (M&G don’t see any for another 2 years) but neither will BoE reduce rates as they did post Brexit.
- Neither do they think there will be much change in fiscal policy either (although there may be some loosening in austerity, but limited)
- Rating agencies may downgrade the UK but there is nothing imminent expected.
- Therefore more likely is another general election.
- Believe Hammond now stays as Chancellor.
Steven Andrew (M&G Multi Asset Fund Manager):
- Question he asks is what is the return on offer for the risk in terms of where to allocate capital investment?
- Sees sterling as cheap (for reasons above), therefore M&G “constructive” on sterling.
- Where can they find value?
- Looking at equities, broadly markets are up 20-25% since the Brexit vote but that is too simplistic a view as there is a lot going on underneath that at sector level. Individual sectors have seen quite variable performance especially those exposed to the UK domestic market (given concerns about growth & real wages growth). Yields of 6-8% can be found which makes equities far more attractive compared to gilts.
- Gilts: UK gilts in particular look vulnerable as they are expensive. Hasn’t held any UK gilts for 2 years.
- Political events are continuing to drive markets but the reasons are fragmented and not singular so that a political angle can always be found to justify any market movement (e.g. nationalism, globalisation, Trump, Brexit etc.) While political motivations behind markets are interesting they are not rational.
- On a global level, UK politics is noise, therefore markets are largely unmoved. More important is global growth / trade flows and the metrics on that have generally been good over the second half of last year and the first half of this year.
In response to Questions:
Q: What is the outlook for UK inflation and interest rates?
A: Expect weaker £ to drive up inflation due to increasing import prices in short term but argue this inflation is temporary as it will disappear when the currency normalises (unless it starts to be reflected in wages growth). This inflation viewed as bad inflation as central banks can’t control it via interest rates. Wages are the key inflation indicator for the economy not CPI.
Q: View on currency investing
A: M&G tendency is to hedge their US$ exposures back against the £ since the £ is cheap. Steven is still positive on US valuations as they’re supported by earnings growth.
Q: What should advisers be telling their clients to do in response to UK election?
A: Nothing, stay invested.