14th May 2015
The unexpected clarity provided by the outcome of the general election has freed the UK economy from the shackles of uncertainty, leaving the domestic economy, and banks in particular, set to flourish, according to Steve Davies, manager of the Jupiter UK Growth Fund. But he warns the promised referendum on UK membership of the European Union remains a concern. Below he outlines his outlook…
After a general election campaign that appeared so close, with a wide range of potentially confusing outcomes, the good news is that Friday 8 May gave us a clearer result than anyone could have expected. Even though the Conservatives now have a slim majority by historical standards, the surprise nature of the result makes it feel like a landslide. With the risk of weeks of prolonged political wrangling now off the table, markets have reacted positively.
I would pick out two areas which should benefit from the new political backdrop: the UK domestic economy and in particular banks.
The election result was good news for UK banks because it removed some of the risks that the sector might have faced under a Labour-led government. Labour had pledged to increase the bank levy, tax bonuses and seemed set to take a generally more combative approach to the sector’s regulation. There was also the vague threat to “break up the banks” whereas now it will be left to the competition authorities to oversee the sector.
Alongside this, there were further encouraging signs from the latest set of Q1 bank results just prior to the election. Lloyds, in particular, delivered a strong profit performance and continued to increase its capital levels well above regulatory minimums. This supports our longstanding view that the bank can return to paying very substantial dividends over the next couple of years and finally get the UK government off its share register. We trimmed some of our bank holdings in April as a precaution against a bad electoral outcome but I have now taken these back up to previous levels.
The UK domestic economy continued to perform well even in the run up to the election and there is a good chance that it accelerates in the second half of the year. Housing-related sectors in particular should, in my view, be clear beneficiaries of the post-election environment now that fears about a mansion tax, (as well as the impact of a possible bonus tax and an increase in the top rate of income tax) have fallen away. In this area, the Jupiter UK Growth Fund already holds Taylor Wimpey, Countrywide and Zoopla in the portfolio and I have added to two of those positions.
More broadly, UK consumers can now get back to their daily lives. Disposable income in the UK has risen sharply so far this year, aided by rising employment, some wage growth and a sharp decline in the cost of essential items like petrol, utilities and food. Some of this fed into increased spending in the early months of 2015, but there were also some indications of a wait-and-see approach in the run up to the election. As this uncertainty drops away, our holdings in companies like Dixons Carphone, Howden Joinery and ITV should be well placed to benefit.
The electoral outcome does, of course, also bring with it some potential negatives. One of the biggest risks to the macroeconomic outlook for the UK is the promised referendum on UK membership of the European Union. The timing of the vote has yet to be announced, but I suspect that David Cameron will not want the debate to be a distraction for too long. In any case, the uncertainty created by the referendum may have a negative impact on business investment, so that is something we will be keeping a close eye on over the coming months.
It’s become a cliché that “markets hate uncertainty”, but it is true. In the lead-up to the election I increased the cash position of the Jupiter UK Growth Fund and held that cash in US dollars rather than sterling. This was an insurance policy of sorts, based on the view that I couldn’t confidently predict the outcome (and, as things turned out, nobody could!). Once the result became clear, however, I unwound the currency hedge and reduced the cash position significantly. The clarity of the election result is a clear positive and reinforces my optimistic outlook for the UK stock market.