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 - Head of Multi-Asset Income
We expect some further recovery in sterling and UK domestic stocks on reduced uncertainty and the removal of the tail risk of market-unfriendly policies ̶ although a fair amount of this is already in the price, given the polling in advance of the election. UK political uncertainty has manifested in weak business investment, which has contributed negatively to GDP growth for five of the past eight quarters, and a subdued housing market, with national house prices failing to keep track with inflation.
The Conservative win has provided some near-term economic clarity, as the UK will finally leave the EU and public sector net investment will increase back to historically high levels. We believe markets will begin to anticipate a Boris ‘boom-let’. This would tend to support higher gilt yields (the UK is one of the most expensive government bond markets we cover) and a stronger pound. However, we feel the rally will be limited, due to the potential for a swift post-Brexit transition to further uncertainty about the UK’s future trading relationship with the EU.
To limit the impact of election uncertainty on the portfolio, we positioned relatively low weights in UK domestic assets and sterling.
Simon Brazier - Co-Head of Quality
We expect an initial bounce as the market reacts positively to greater political certainty, particularly with regards to Brexit. Sterling is likely to appreciate further amid this initial optimism, benefiting smaller more domestically focused companies relative to their larger more globally diversified peers.
The market had already started to price in a Conservative majority, which may limit the size of any short-term gains, and in reality ‘getting Brexit done’ only applies to the Withdrawal Agreement. Far greater uncertainty still exists around a trade agreement, where the risk of ‘no deal’ remains, particularly given Boris Johnson’s stated aim of a deal by the end of 2020 or leaving without one. We believe business investment is likely to remain weak amid this ongoing uncertainty. With consumption growth constrained by a record-low savings ratio, the UK economy is still vulnerable in the longer term.
We continue to focus on high-quality companies that are able to generate cash even in tough economic conditions, and re-invest that cash at attractive rates of return. We also continue to carefully manage economic, currency and liquidity risk at the portfolio level.
Ken Hsia - Portfolio Manager, 4 Factor - Europe
A Conservative majority had increasingly become the consensus view in the run-up to polling day, reflected in the gradual strengthening of sterling. While it introduces the least fresh uncertainty, the final Brexit terms and any trade deal with the EU remain to be established. Thus, while we expect a relief bounce in UK-centric companies that have de-rated to trade at a discount to the rest of Europe, we do not expect an immediate impact on incomes or corporate investment within the UK.
We maintain neutral portfolio positioning with respect to Brexit. Much of our UK weighting relates to multinational companies that derive most of their revenues overseas, although we do hold a financial company and a UK housebuilder. We believe both of these stocks are quality assets trading at a discount that should benefit from the incremental reduction in economic uncertainty.