With just over two weeks to go until the UK General Election, the race to number ten gathered steam this week, with political battle lines now firmly drawn on key policy differences. While the overall outcome of the vote still remains uncertain, it is clear that the next two weeks will be action-packed, with the leaders of the key parties already butting heads over issues such as public spending and Brexit.
In recent weeks, the polls have shown the same pattern of movement as they have throughout the campaign. Overall, the Conservatives have gone up in the BBC and Financial Times poll trackers, while support for the Brexit Party continues to decline since Nigel Farage announced that the party would not contest seats won by the Conservatives in 2017. After pulling ahead earlier this month, more recent polls suggest that the Conservative shift is beginning to level off. A Kantar poll was published yesterday that showed the Conservative lead falling from 18 points to 11, with Labour gaining 5 points since a week earlier. And an ICM poll on Monday put the Tory lead at just 7 points, the smallest from any pollster since the first week of November. Overall, the shift has not been huge, with the average Tory lead in polls taken over the past week dropping from 14 points the previous week to 12, shown in the graph below. It seems likely that the manifesto launch on Thursday has boosted Labour, gaining ground from the Conservatives and the Lib Dems. In the four polls carried out wholly since then, the party has gained between zero and five points.
At 10pm this evening, YouGov are expected to release details of the most eagerly awaited poll of the UK general election. Its so-called MRP poll will appear in the Times newspaper, predicting the result of the Dec 12 vote, seat by seat. The poll uses a recently developed technique that aims to give a more detailed prediction than a standard opinion poll. In the 2017 election, YouGov’s MRP poll predicted that Theresa May would lose her majority at a time when every other poll was suggesting her Conservatives would secure a big win. At the same time, YouGov are keen to point out that it does take a while to produce a poll like this, so it doesn’t reflect late swings in opinion.
Our Plan Going Forward
With the UK general election campaigns now in full swing, we are turning our attention to domestic equities, where we see opportunities after months of Brexit-induced underperformance. As mentioned in previous commentaries, overall investor sentiment toward UK-based stocks is starting to improve, with many strategists claiming that the country’s shares are “potentially the best global equity opportunity for 2020”. These stocks appear set to benefit as a result of a much-reduced risk of no-deal Brexit, relative valuations at 30-year lows, and asset managers seeking opportunities for returns after being spooked by all the political drama of the past year.
- UK Opportunities
UK small and mid-caps appear particularly attractive at this point, given their high domestic exposure and low valuation in both absolute and relative terms, with the FTSE UK Small Cap index currently trading at a 35% discount to its 20-year average. The case for UK equities goes beyond valuation levels though, as the macro-economic picture could also become a catalyst for a recovery. The UK economy is expected to rebound strongly next year, helped by substantial fiscal stimulus which is expected to be at least 1.5% of GDP (according to Credit Suisse estimates), irrespective of which party forms the new government after the election. Additionally, as Brexit-related uncertainty abates, with risks of a no deal Brexit reduced, foreign investment is likely to return to the UK. Increased foreign investment combined with fiscal stimulus would boost consumer spending, which has been depressed since Brexit, and would particularly benefit smaller, domestically based UK companies. For this reason, should the Conservatives appear increasingly likely to get a majority as we approach the election, it is likely that we will increase our exposure to UK small/mid-caps to benefit from this trend on a strategic basis.
- Sterling Risks
Sterling is currently tracking the odds of a Conservative majority, showing a positive correlation with increased prospects of such an outcome. The pound has been strengthening over the past few weeks as opinion polls suggested a Conservative win and as Conservative candidates pledged to support the passage of Johnson’s Brexit deal should they be elected. Markets are favouring a Conservative majority government as the best outcome from the Dec. 12 vote as it would allow Johnson to push through his Brexit plan and move on to the next phase of Britain’s exit from the European Union. Due to the expected appreciation in sterling we still see significant risks in the larger, FTSE 100 UK companies, as a significant proportion of their profits come from overseas revenues. For this reason, we are maintaining our short on the FTSE 100, and hedge our non-UK exposure back to sterling to reduce currency risks.
- A Trade Deal
While we await greater clarity on Brexit and the UK General Election, due to risks arising from the ongoing trade conflict between the US and China and the sterling risk as well as declining economic fundamentals for large caps, we retain low exposure to global equities. Should a phase one trade deal be agreed however, we do see opportunities arising in Global and European Small/Mid Caps space which has largely been an unloved asset class in recent years, and is set to benefit from a rotation away from large caps and increased fiscal stimulus. While the Brexit issue remains unresolved, it is likely that we would hedge this exposure back to sterling to mitigate currency risks, however if the election results in a Conservative Majority and a subsequent appreciation in sterling, it is likely that we will add these opportunities into the portfolio without the hedge being needed.
For more information about calls for Eurozone stimulus, please see the attached Market Update Document.
While it is certain that markets will remain volatile in the coming weeks, as we come closer to the UK General Election and a potential phase one trade deal, opportunities are likely to arise, allowing us to benefit from strategic changes in our portfolio. Ahead of the election, should the polls continue to suggest a Conservative majority is likely, it is likely that we will add to our UK small/mid cap exposure, where we see an opportunity for outperformance. We are poised to act to redeploy cash into opportunities as they arise, therefore should we get a phase one trade deal in the coming weeks, we are also prepared to add to Global and European Small/mid cap equity exposure to benefit from favourable market conditions for these stocks. As always, we will keep you updated with any changes to positioning and the data.
Key Events We Are Watching This Week:
- Wednesday: YouGov UK Election Poll
- Thursday: EU Economic Sentiment
- Monday: US Manufacturing PMI
Model Portfolios & Indices
Most global equity markets gained over the week amid optimism regarding a US-China trade truce after US President Trump said on Tuesday that Washington and Beijing are close to an agreement on the ‘phase one’ of a trade deal. Top negotiators from both countries spoke by telephone and agreed to keep working on issues.
Safe haven assets, such as gold were relatively flat over the week as investors remain uncertain on the near-term outlook of the global economy. The OBI portfolios remain defensively positioned with limited equity exposure, and our portfolios remain well positioned given current conditions. The portfolios gained over the week owing to the defensive positioning, with changes made in recent weeks expected to continue to provide further support to portfolio performance going forward.
As we progress from here, it is important to recognise that we should not let benchmark performance make us feel like we have missed out on anything, because although we have in the short term, recent performance shows how quickly this can be reversed given current levels of risk and uncertainty.
Overall, it is our view that equity markets will continue to decline before adjusting to the new norm based on lower global growth and weaker corporate profitability. The key point here is to take a long-term view, look at the current level of uncertainty in the global economy, and remember that the portfolio is designed to minimise your exposure to risk and preserve capital. Markets are behaving irrationally, therefore the most sensible strategy is a defensive one given current market conditions.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1967, French President Charles de Gaulle said ‘Non!’ to British entry to the European Common Market for the second time. In stark contrast, President Macron is now arguably the largest critic of the UK’s departure from the European Union.
Have a great week,
Jason & Gina