Standard Life Investment - Post UK Election Webcast

Friday 9th June 2017

Stephanie Kelly (Political Economist)

• Downward movement of SNP poll average signifies marginal reduction in likelihood of second Scottish independence referendum.
• Sentiment is that commitment to austerity will be put under pressure as legislating becomes more difficult with a smaller majority. Considerations of other parties becomes more important to ensure legislation is passed.
• Interventionist policies such as caps on energy prices and increases to the minimum wage are likely to garner support from other parties, so are more likely to be introduced.
• On Brexit, the election result may require Conservatives to make more compromises, both with factions within the Party and with other Parties in order to pass exit legislation.
• DUP was pro-Brexit during EU Referendum campaign, although their manifesto was more conciliatory and stressed the importance of the border issue in Ireland. Ultimately they would regard no Brexit deal as worse than a ‘bad deal’, as the border issue would remain unresolved. This will need to be considered by Conservatives when approaching Brexit talks.
• The requirement for balance makes compromise by the UK more likely.

 

Liam O’Donnell (Fixed Interest Investment Director)

• Moves in Gilt market have been relatively small compared with previous political events.
• Hung Parliament would usually be ‘risk-off’ and very supportive for Gilts, but initial reaction was slightly weaker.
• Gilt curve showed short-term Gilts doing better than long-term. This is partly due to drop in sterling there is increased risk of inflation risk premium being built into the curve. Also, a Tory majority was considered most fiscally restrictive and would most likely result in less Gilt supply, which would be positive for Gilts.
•  Anything other than Tory majority is seen as increased likelihood of Gilt issuance, which is negative for Gilts as a whole.
• On basis of election result, Monetary Policy Committee (MPC) have priced in around 0.05% of easing in over the first year.
• Market forecasts first hike by the MPC to be moved from July 2017 to November 2017, although this is not seen as a significant move relative to historical political events. This supports view that MPC would keep levels on hold for longer in the event of a hung Parliament.
• DUP considered as similarly restrictive in a fiscal sense.
• Trajectory of the economy and, in particular, inflation, will be very important for the direction of Gilts in the longer-term.
• Significant weakening of sterling could be seen as negative for Gilts in the eyes of international investors. Typically, international investors have supported UK Gilt market, therefore no significant impact on demand is expected in the short or medium-term.
• In general, expectations are for global QE to recede as governments are looking at ways of incorporating fiscal policies to stimulate economic outlook.
• Outlook for net bond supply is increasing, with more bonds coming to the market and not being purchased by Central Banks. This should allow yields to increase.

 

Thomas Moore (UK Equities Investment Director)

• Currency has played major role in UK equity markets, not just today, but in recent months and quarters.
• Market has become unusually macro-driven, with typical stock specific considerations being outweighed by macro developments.
• FTSE 100 companies generate over 70% of revenues from overseas, whereas FTSE 250 generate c.42%. This has caused the FTSE 100 to outperform the FTSE 250 over the last 18 months, where sterling has depreciated.
• Individual sectors driving performance differential between two indices. Sectors such as Materials and Energy on the FTSE 100 generate the bulk of earnings in USD, so are relatively unaffected by UK political events.
• Defensive sectors such as Telecoms and Utilities on the FTSE 100 have performed reasonably well, too, with gains of c.1% on the day.
•  Conversely, sectors such as Consumer Discretionary and Real Estate on the FTSE 250 are significantly impacted by political concerns.
• Election result has removed some of the most extreme policy risks on both sides, for example, Labour’s policy of nationalisation, and the Conservatives’ policies of austerity and a hard Brexit.
• Share price reactions today have been understandable. However, there is potential for the market to take a longer-term view which may be more conciliatory and market-friendly.
• Expectation is that the Government will maintain a ‘light touch’ with regards to regulations on employment and product markets, relative to other economies. As a result, the UK will remain an appealing market to invest and operate in.

In response to questions:

Q: What is the probability of another General Election before Christmas?

A: Unlikely due to voters becoming frustrated with frequency of important elections and referenda. Also, the ‘Brexit clock’ is ticking and focus needs to go towards this. That said, the only thing that may bring about another election would be if a number of Conservative of DUP MPs lose by-elections which may arise.

Q: Do you think it is possible the pound will drop below $1.20?

A: Fiscal policy will be looser which is supportive of growth. Also the prospect of a softer Brexit should be positive for sterling. Again, it would only become likely if the majority is threatened or if there becomes a real risk of no Brexit deal.

Q: What changes were made to GARS and the MyFolio range prior to, or in the aftermath of the election?

A: With GARS, there is no significant exposure to UK, so no changes made before or after. No changes made to MyFolio specifically as a reaction to election result.

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