Be wary of specific sector bets, but look to policy changes around smaller firms for opportunities.
With less than three months to go until the General Election, we’re no closer to a clear outcome. The two largest political parties have almost identical support in the opinion polls – both are hovering at around 32-33 per cent. Labour seems to have the edge, but certainly not enough for a majority. Another coalition is likely, and trying to work out who might suddenly become friendly with who is confusing – even for the most excited of analysts. But, as in markets, three months is a long time in politics, and the vote can swing significantly and quickly.
At Nutmeg, we have been giving a great deal of consideration to how we position investment portfolios ahead of the inevitable election chaos. The battleground is clearly set between Conservatives and Labour: an unrestricted Tory government would spend less – much less – in the next five years. Labour would cut spending, but at a far gentler rate. The Tories will attack welfare benefits to save funds, Labour will tax the wealthy to gather funds.
Calculations from the Financial Times show the difference in real terms: in 2019-2020, the Conservatives will be spending £27bn a year less than Labour. That difference translates to an awful lot of public sector jobs and state aid. Labour believe that in order to get the economy firing again, the government needs to be spending more. If you believe that is correct, then the strength of your conviction is, naturally, balanced against your acceptance of, or distaste for, borrowing.
But whatever happens, this General Election is unlikely to deliver a UK investor-friendly result – be it a one-party majority or (more likely) a coalition. So what are the likely fallouts, and how can you best mitigate them for your savings and investments?
First and foremost, consider the impact on markets. They’re likely to view a Conservative victory as better for the long-term British economic and investment outlook. This is owing to a number of factors but, put simply, amounts to Conservatives being lower debt, lower spending and Labour being higher debt, higher spending. A Conservative win will mean a stronger pound and – given they are the incumbent – relative stability in markets. A Labour victory, given less of a focus on austerity, will weaken government bond prices and lead to higher borrowing costs.
In this case, bond prices will fall, and the value of traditional “low risk” portfolios (comprised of cash and bonds) will fall too. If the Labour plan to revitalise the economy is seen as realistic, then extra money in the economy could push up stock market valuations.
Be careful about taking sector specific bets in the run-up to 7 May. For example, energy shares are likely to suffer if Labour wins, given their stance on price fixing of energy costs. Consider how changes in financial services and healthcare legislation will impact publically traded companies. It’s worth making sure that you are doing the necessary research to avoid stocks and sectors that will be hit by policy change.
Secondly, when it comes to your portfolio, diversify it sensibly – make sure that your investments are not all UK focused. Don’t follow the herd by picking one of the “star” fund managers or choosing funds from “best-buy” lists.
Construct a robust portfolio that has exposure to different asset classes (bonds, equities and commodities, for example) and countries. We believe, for instance, that the US will be one of the strongest performing stock markets in 2015 and, therefore, it’s important to have significant US exposure. Naturally, US investments won’t be as correlated to UK election results as much as UK investments.
Thirdly, if you have a financial advisor or investment manager, make sure that you call them as soon as possible to ask what they are planning for the elections. “Nothing” or “it’s too far away at the moment” is not a sufficient answer. After all, they are there to look after your portfolio and it is important that they a) have a strategy and b) communicate this strategy.
Doing nothing is as much a bet as doing something. Even if doing nothing is their plan, you should be aware of the consequences of this, given the various outcomes of a particular side winning, or a hung parliament.
Fourthly, take note of currency risk. It won’t just be the stocks or funds that you select that will matter. The election result could alter the value of sterling significantly. A stronger pound will mean a harder time for exporters. A weaker one (which is more likely if Labour wins) will be tough for companies that rely on importing raw materials. Remember that you (or your investment manager) can buy funds with currency risk “hedged”.
And finally, there may be opportunities that can be built from policy changes around smaller companies, such as those listed on the Aim. Look out for what the major parties have to say about fundraising and listing rules. And if you are an experienced or high-risk investor, consider where you might be able to take advantage.
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.