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Investec Asset Management portfolio managers give their views on the UK General Election result.

The views expressed in this communication are those of the contributors at the time of publication and do not necessarily reflect those of Investec Asset Management as a whole.

John Stopford
Co-head Multi-Asset Income; Portfolio Manager, Global Multi-Asset Income

Read John's views

Clyde Rossouw
Co-Head of Quality; Portfolio Manager, Global Franchise Fund

Read Clyde's views

Ken Hsia
Portfolio Manager, European Equity Fund

Read Ken's views

Mark Breedon
Co-Head 4Factor Equity; Portfolio Manager, Global Strategic Equity Fund

Read Mark's views


 

John Stopford

Co-Head of Multi-Asset Income; Portfolio Manager, Global Multi-Asset Income Fund

The UK election has heightened uncertainty just as Brexit negotiations begin. Theresa May has failed to get a strong mandate to do a deal on her terms, and indeed she may not survive as Prime Minister. The Conservatives seem likely to form a minority government, and are fairly split between Remain and Leave supporting MPs. Overall, the result probably reduces the risk of a Hard Brexit, but also makes any deal more difficult. The other big takeaway is clear support for more public spending and less austerity.

In terms of the implications of this, uncertainty, scope for messy divorce negotiations with Europe, as well as signs of a weakening economy, are all negatives for Sterling, especially after the pound rallied into the election, but an increased chance of a softer Brexit and more fiscal spending should be supportive. Volatility in a range seems most likely, perhaps with a negative bias. Gilt yields should probably rise a little as well, but economic weakness could limit this. For equities, the result is mostly noise, but Brexit and soft domestic demand are probably still a headwind for FTSE 250 companies, and the FTSE 100 will remain subject to Sterling swings given the dominance of foreign currency earners.

In the Multi-Asset Income portfolios we have bought some options on the pound to benefit from volatility and have a modest short Sterling position, but will look to buy weakness and sell strength. In equities, we hold a modest exposure primarily to UK-listed exporters, with most stock exposure in other jurisdictions. We have almost no UK bond exposure. Having a global opportunity set and no geographic bias, allows the portfolios to exploit potential elsewhere and avoid taking much UK linked exposure in uncertain times, while focusing single-mindedly on our three objectives of a reasonable yield, scope for capital growth and low volatility.

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Clyde Rossouw

Co-Head of Quality; Portfolio Manager, Global Franchise Fund

It is hard to draw too many firm conclusions at this early stage given the likely minority conservative government. However, we do not see this election result as materially negative for UK markets in the short term given the international nature of the FTSE All-Share. In the meantime, we already expected the UK economy to have a challenging outlook on account of uncertainty over the terms on which they will exit the EU. If anything, perhaps the odds of a softer Brexit will improve now, but the process will be even more convoluted.

We expect the election result to have minimal impact on the portfolio or how we position it. Whilst we have around 15% of the portfolio in UK-listed companies, these companies are highly multinational with very limited exposure to UK domestic sales. We would draw attention to the largely global focus of the portfolio in terms of listing domicile and revenue, which would buffer any specific adverse UK market outcomes. One should be wary of poor quality businesses whose economics continue to deteriorate, but which might be benefitting in share price terms from weaker sterling. Such returns are overly flattering. Rather we will continue to focus on quality companies that have strong prospects to grow their cash flows and reinvest at high rates of return. This compounding of resilient cash flow streams is what drives the performance of our companies in the medium to long term and nothing today will materially impact their ability to do this.

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Ken Hsia

Portfolio Manager, European Equity Fund

As Britain’s voters deliver another surprise relative to expectations of just a few weeks ago, this time, unlike Brexit, the ramifications appear to be a uniquely domestic affair. With a hung Parliament Sterling takes another, albeit minor, hit after its recent rally but global markets are broadly unconcerned about a result that potentially makes the process of Brexit more difficult but if anything likely softens the “Hard Brexit” line being pushed by many in the Tory party as the outcome can broadly be interpreted as a call to soften the Brexit stance and negotiate access to the single European market. This shift in emphasis is more likely if the Conservatives end up governing with the help of Northern Ireland’s DUP who want a frictionless border with the Republic of Ireland. The Socialist opposition however will be invigorated by this result and the position of its left wing leader enhanced and some of the more radical elements of their manifesto now likely to become entrenched and any centrist shift is now off the table.  The unity of the United Kingdom also appears strengthened with the Scottish Nationalist Party losing ground and although still commanding a majority in Scotland, are likely to face greater resistance to their call for another independence referendum.      

Implications for the UK equity market appear relatively benign at this stage as heightened uncertainty around the shape of any new government is offset by relief that a “Hard Brexit” strategy is likely to be watered down. Beneficiaries should again be those companies who generate a large portion of their sales overseas and therefore gain from Sterling weakness while more domestically orientated groups, and particularly those who are sensitive to consumer sentiment, are probably more vulnerable.

So overall despite the extraordinary speed of the turnaround in the UK Conservative party’s fortunes global investors are not going to be unsettled by this result. They have bigger things to worry about.

From a portfolio perspective, the majority of our UK-listed holdings are multinationals that do substantial amounts of their business outside of the UK, and in many cases will benefit from the weakening of Sterling.  Of our holdings that are entirely UK-exposed (4% of the portfolio), one is a housebuilder that we expect will continue to benefit from favourable supply-demand dynamics in the sector and limited change to government policy. The other two are challenger banks (one, Shawbrook, is in a bid situation) that are inevitably sensitive to any shifts in GDP growth expectations.  

We will continue to run a balanced portfolio and will adjust as necessary - and seek to take advantage of any opportunities afforded by elevated uncertainty - by consistently applying our 4Factor investment process.

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Mark Breedon

Co-Head 4Factor Equity; Portfolio Manager, Global Strategic Equity Fund

As Britain’s voters deliver another surprise relative to expectations of just a few weeks ago, this time, unlike Brexit, the ramifications appear to be a uniquely domestic affair. With a hung Parliament Sterling takes another, albeit minor, hit after its recent rally but global markets are broadly unconcerned about a result that potentially makes the process of Brexit more difficult but if anything likely softens the “Hard Brexit” line being pushed by many in the Tory party as the outcome can broadly be interpreted as a call to soften the Brexit stance and negotiate access to the single European market. This shift in emphasis is more likely if the Conservatives end up governing with the help of Northern Ireland’s DUP who want a frictionless border with the Republic of Ireland. The Socialist opposition however will be invigorated by this result and the position of its left wing leader enhanced and some of the more radical elements of their manifesto now likely to become entrenched and any centrist shift is now off the table. The unity of the United Kingdom also appears strengthened with the Scottish Nationalist Party losing ground and although still commanding a majority in Scotland, are likely to face greater resistance to their call for another independence referendum.

Implications for the UK equity market appear relatively benign at this stage as heightened uncertainty around the shape of any new government is offset by relief that a “Hard Brexit” strategy is likely to be watered down. Beneficiaries should again be those companies who generate a large portion of their sales overseas and therefore gain from Sterling weakness while more domestically orientated groups, and particularly those who are sensitive to consumer sentiment, are probably more vulnerable.

So overall despite the extraordinary speed of the turnaround in the UK Conservative party’s fortunes global investors are not going to be unsettled by this result. They have bigger things to worry about.

The Global Strategic Equity portfolio is unlikely to be significantly impacted. We are marginally underweight the UK relative to benchmark and are focused on more globally orientated investments such as Unilever, Shire, Micro Focus and Meggitt whose sterling profits are likely to be enhanced by currency weakness.

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Important information

The information above discusses general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. Such references are not a complete list and no representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.

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