Posted on: 14 May 2015
The General Election result was a shock for polling companies,
providing the Conservatives with an outright majority and the UK
with a return to one-party rule. However, while politically
significant, UK elections are far less important to UK equities
than is commonly assumed.
Last year we changed our recommended asset allocation to be more
defensive and have since reduced our UK exposure. When we make such
changes, we are looking years ahead rather than months and the
election result does not change our caution regarding UK equity
market valuations and the vulnerability of sterling.
In fact, the US market is far more important to the performance
of UK equities than our domestic politics. The chart below shows US
and UK equities since 1984 and you can see that, while UK shares
have underperformed in recent years, in terms of trend London
follows Wall Street. We will be watching the US economy with
interest and expect markets to be volatile in the run up to the
first rate increase by the Federal Reserve.
There is one political issue that will be a focus for markets
now the election is out of the way. With a Conservative majority,
the Government will press ahead with its plans to hold a referendum
on our EU membership, perhaps as early as next year. While the
prospect of a perceived anti-business Labour government was not
popular in board rooms, the thought of the UK leaving the EU will
be of equal or greater concern. This would have enormous economic
consequences that will feature heavily in our asset allocation
discussions in the months ahead.
Despite its post-election rally, we believe sterling faces
medium- to long-term headwinds. The UK has the largest current
account deficit in its history, which means we are very reliant on
capital from overseas and vulnerable to economic shocks. This is
one of the main risks to the economy highlighted by the Bank of
Another concern is the economy's low level of productivity,
which suggests that future economic growth could be more muted than
in the past. Other threats to sterling include the UK's potential
departure from the EU and a breakup of the union with Scotland.
Within this context, the dollar looks like a more robust
The central thesis behind our conservative asset allocation
positioning is that the equity bull market that began in March 2009
is now at a mid to late stage. Corporate profit margins are also
high and the next move in interest rates is likely to be higher.
While markets can and may make further upward progress, returns
will be lower than in the last few years and vulnerable to
setbacks. The UK General Election was an interesting event, but
does not change these facts. Therefore, although we will follow
Government policy closely, particularly plans for an EU referendum,
nothing we have seen so far changes our thinking.
All data has been compiled by Duncan Lawrie from
sources believed to be reliable.
Full details of sources are available on
The comments and figures in this document are
generally applicable but you should always take specific
advice to suit your
individual circumstances before taking any action. Errors and
The value of investments and income generated may
fall as well as rise, and investors may not get back
the amount invested. Past
performance is not a reliable indicator of future