Opinion polls are pointing to the Conservative Party securing a majority government, and fund managers are positioning to profit.
With just 10 days to go until the 2019 general election, opinion polls are pointing to the Conservative Party securing a majority government – a prospect the UK stock market seems to also be pricing in, with the FTSE 250 index hitting a 15-month high last week.
The index contains medium-sized businesses with more of a domestic bias than those listed in the FTSE 100. Therefore, their fortunes are more linked to the UK economy and by extension are more sensitive to political risk. The index has gained almost 20% since mid-October; its recent gains are being viewed as a sign the market is becoming more confident the Conservatives will win a majority on 12 December.
Ben Yearsley, of Shore Financial Planning, notes that November as a whole was a strong month for more domestically geared UK shares. “As has been mentioned several times over the last few years, the UK market is unloved, under-owned and cheap on many metrics, and the current gap between gilt yield and dividend yield is the widest since the reign of Queen Victoria.
“Political clarity has been lacking – Brexit and a hung parliament has led to paralysis and lack of investment. The resurgence of small and mid-cap companies in the UK is possibly a sign that is confidence is returning.”
But he cautions “all the recent positivity in UK markets could evaporate quickly in the event of another hung parliament or a Corbyn-led government”.
On that front various opinion polls have indicated that Labour have made some strides in narrowing the gap, with a survey conducted by BMG Research (carried out on 27 to 29 November) pointing to a six-point lead for the Conservatives. Compared to its previous poll (conducted on 21 November) the Tories are down two points to 39%, while Labour is up five points to 33%.
Some fund managers, though, are seeking to take advantage of the trend towards greater confidence in a Tory victory, including Joseph Bunting, manager of the Tellsons Endeavour fund.
He says: “About a month ago we thought it would be difficult for the Tories to get a working majority as we felt they would potentially lose seats to The Liberal Democrats in the south east of England, but we are now more bullish and so have therefore been increasing our UK equity exposure to take advantage of very cheap valuations.”
The global mixed-assets fund, which sits in the Investment Association’s 20%-60% shares sector, has 15% in UK equities, with around 10% in domestic business and 5% in the more internationally concentrated names. The six domestic firms he holds are Lloyds Banking Group, Royal Bank of Scotland, Barratt Developments, Taylor Wimpey, Rightmove and Whitbread.
He adds: “We can see a near-catalyst for UK domestic stocks to be re-rated, which is why the fund is positioned to take advantage. But all bets are off if a Tory majority is not achieved.”
Other fund managers, including Mark Slater, manager of the Slater Income, Slater Growth and Slater Recovery funds, agree that a catalyst to remove the UK’s “unloved” tag could come from a majority Conservative government that then follows through with its Brexit plans.
In a video interview with Money Observer, see below, Slater notes there are plenty of UK domestic shares that are “great businesses that are sensibly priced.”
He says: “An indication of that is in a normal year we would expect there to be one or two bids for one of our holdings, but this year there has been six bids in our Slater Growth fund alone out of a portfolio of 40 to 45 names. The bidders are overseas businesses benefiting from the weak currency.”
Slater adds a catalyst to remove the UK’s “unloved” tag could come from a majority Conservative government that then follows through with its Brexit plans. “The general election offers the prospect of resolution,” he says.
other investment criteria
All well & fine but eliminating 95% of companies might be harsh & overlook some nascent good quality companies.
I would look for companies producing or delivering good quality products & services locally or nationally -- not candy floss enterprses which lend to finacially straightened people or repair cars at roadside or similar - or offer inv mngmt at exorbitant fees.