UK election result to provide welcome stability for business
Unsurprisingly, the UK election result has been taken well by the UK equity market and in the short-term provides businesses with a stable political and legislative background in which to invest for the future.
The uncertainty around a hung parliament has been removed and the reinstating of a Conservative-led government which is perceived to be more business friendly has propelled the FTSE 100 by 2% within the first hour of trading this morning. The more domestically-focused FTSE250 index is up 3%.
The companies that will benefit
The key beneficiaries of the rise today have been those companies that were impacted by the apparent increasing popularity of the Labour party over recent months.
The threat of a price freeze for UK utility companies Centrica and SSE is clearly now off the agenda which has propelled these shares by 7% and 5% respectively.
UK housebuilders impacted by fears of the mansion tax and less home ownership under a Labour government have also been substantial beneficiaries.
Elsewhere, UK banks and the tobacco sector – which were mentioned as target areas for extra NHS funding – have rebounded, given the assumption that incremental levies are unlikely.
EU referendum on the horizon
Looking ahead, the Conservative manifesto has promised an EU referendum by the end of 2017, which will undoubtedly create some uncertainty going forward but this is unlikely in the short term.
We do not know how significant the threat of a possible “Brexit” really is given David Cameron has not disclosed the messaging around the “in” or “out” campaign. Recent business leader surveys suggest a majority would like to remain within the EU and it seems clear the Europeans themselves would like the UK to remain a significant player in Brussels.
Leaving aside eurosceptic Conservative backbenchers, we hope the economics of Britain’s position in Europe will be the main focus of the referendum debate. We currently run a significant current account deficit with the EU although the financial services sector runs a £19 billion surplus.
Politicians will need to demonstrate they fully understand the implications of remaining within or withdrawing from the EU.
Stability for UK companies
In the short-term it seems clear the election result should provide businesses with a stable political and legislative background in which to invest for the future. We welcome that stability and anticipate the UK economy growing above 2% for the next couple of years which should be beneficial for UK companies, particularly those with a domestic focus.
We remind investors that international influences continue to be extremely important given 75% of revenues are derived overseas for the UK quoted market. We remain optimistic on the broader global economy which has a significant bearing on the companies in which we invest.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.