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Election 2019: more uncertainty

Tom Stevenson

Tom Stevenson - Investment Director

Markets, they say, hate uncertainty. While this is not the whole story - because uncertainty creates opportunities too - it is certainly true that political gridlock can lead to weak sentiment and lower average valuations. If you want to know why shares are cheaper in the UK than in many other markets, look no further than Brexit.


On the face of it, a pre-Christmas election is good news. It offers at least the possibility of a Government with the majority it needs to push through both the Brexit outcome it prefers and its favoured economic model too. That is surely better than the gridlock we find ourselves in today.

However, it is far from certain that this is what the election on December 12 will actually deliver. That’s because the EU referendum in 2016 changed politics out of all recognition. The two party, left-right split that has defined British politics for the past hundred years or so has been replaced by an altogether more complicated and unpredictable landscape.

Political views are now polarised in two directions. The old left-right divide is still in place and the election will in part be fought on the familiar territory of tax and spend, with Labour promising more of both than the Conservatives (although the promises of both parties are likely to look implausibly lavish compared with recent history).

But another axis has appeared in the past four years - the remain-leave question cuts across traditional party divides and has created a new breed of floating voters who may vote one way if they are focused on Brexit and another if they are thinking about the economy. How they choose to vote on the day is anyone’s guess.

This makes the upcoming election extremely hard to call and a massive risk for all the main parties. And it really is a question of all the parties and not both of them because both the Brexit Party and the Lib Dems are important players this time around.

An election is a bad way to decide a one-issue question like Brexit. A better approach would probably be a second referendum to answer the European question followed by an election to decide the other issues. But there is no appetite for that for the good reason that it sets a bad precedent to ask the country what they think and then ask them again if you don’t like the answer.

Turning to the investment implications, we need to think in terms of the probabilities assigned to various outcomes. The two most important of these relate to Brexit and the economy.

First, what is the chance that Brexit will be decisively resolved, allowing businesses to restart stalled investment programmes and giving individuals the confidence to make important financial decisions?

Second, what is the chance that a radically different economic and fiscal environment will emerge (as proposed by Labour, for example)?

Given that the answers to both of these questions will only become clearer as we approach election day, investors can do little today other than prepare for the unexpected and ensure that they are protected against the more extreme outcomes.

In light of the compelling valuations in the UK stock market, it makes sense to have some exposure to our domestic market but probably not a heavy weighting given the remaining uncertainties.

Even a Conservative majority that leads to an exit with a deal would leave open the question of what happens at the end of the transition period in December 2020. A no-deal Brexit in a year’s time is still very much on the table. Getting Brexit done really just means getting Brexit started - the hard negotiating will have only just begun.

A Labour majority, meanwhile, would open the door to the most radical economic proposals since the 1970s. Investors would need to price in the prospect of widespread nationalisation, higher taxes and sharp rises in public spending.

Within a UK allocation, investors also need to consider the rotation between growth-focused investments and more cyclical value plays that has been happening since the summer. More clarity on Brexit might lead to a pick-up in the economy that would favour value shares. Continued uncertainty would argue for an ongoing focus on defensive shares that can perform in any environment.

The Select 50’s UK category has a good spread of funds focused on both these approaches. For a more defensive approach, the Liontrust UK Growth Fund has a focus on oil & gas, pharmaceuticals and consumer staples stocks like Diageo and Unilever. Managers Julian Fosh and Anthony Cross look for companies with ‘pricing power’, the ability to push up prices regardless of the state of the economy, an approach they believe insulates the portfolio from uncertainty.

Value investors might consider the Fidelity Special Situations Fund managed by Alex Wright. He looks for out of favour companies entering a period of positive change. Although there is some overlap with the Liontrust fund (both hold Shell and BP in their top 10 investments), there is a much greater focus on cyclical sectors like construction and financials.

The UK election is bound to dominate the local headlines for the next six weeks, and rightly so because the decisions we take as voters in December will have profound long-term consequences for the country and the economy.

But investors also need to see the election in a wider context too. Bigger questions like the direction of US monetary policy, the resolution or not of the US-China trade war and how the rest of earnings season pans out are just as important.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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