NEWS: 20 APRIL 2015
SPRING IS HERE
Spring is at last upon us, the sun has made a welcome return breathing new life into the countryside and the evenings are getting lighter. Soon our trees will be in full blossom and the bluebells will again carpet our forests. Unfortunately, amidst all this splendour we must endure the endless twaddle of this countries politicians scrapping like mad March Hares in the run up to the General Election.
In this commentary I provide my thoughts on the possible effects of the political turmoil on the UK market and examine whether the current high levels of the index are down to excited anticipation for the 7th May outcome, or more fundamental sustainable economic reasons.
In Europe the political landscape has in recent years played a huge role in market sentiment, the most recent being Greece’s new anti-austerity government which continues to threaten the eurozone’s stability as does the current sanctions on Russia as Merkel & Co square up to Putin.
We can expect the UK election to create much uncertainty and a number of post-election scenarios. Whether you believe the opinion polls or not, it's a pretty close call between the two largest parties and the splinter groups, SNP and UKIP, add a further fly in the ointment which could lead to another coalition. So what, if any, will the likely short term volatility be in the run up to May 7th and what of the longer term outlook ?
Well if we use Europe as a recent guide, short term, very little changed as a result of the problems with Greece and Russia and it was not until longer term implications such as austerity measures, sanctions and fuel prices were known, that the markets started to worry and react. However, once these threats are understood markets often stabilise and return to normal operations. It is likely that European markets will not be concerned by the UK election and will not react until the results are known.
In London, the general consensus is that there are two main scenarios. The first is that although figures show a continued recovery from the financial crisis, structurally the UK has massive risks due to a record current account deficit, over stretched public finances, huge levels of household debt and property prices that have risen to a level beyond all but the wealthy. Add to this the potential risks of exiting the EU if the referendum goes ahead in 2017, the UK could have a very unpredictable future and the market would look unattractive.
The second school of thought is more sanguine. Here the argument is that, yes, the UK faces the risks outlined above, but the global story is much bigger. We are no longer one of the biggest economies and global markets are more interested in Europe, North America and Asia. Although London is still an important financial centre, a power house of manufacturing, exports and natural resources we are not. Yet despite our size and fiscal problems we have still managed to emerge from the recession at a faster recovery speed than our European counterparts and therefore still provide good dependable stability for investors, all be it with less excitement.
In a note to investors last week, Stephanie Flanders, chief market strategist at JPMorgan Asset Management, asked whether election uncertainty would have a meaningful impact on the long-term value of UK investments. “We do not believe it will, or at least, we do not believe it will make nearly as much difference as other uncertainties currently permeating global markets, such as the strength of the US recovery and the reaction to the first US rate rise”.
We have seen from our last election and in the 70's that a coalition government tends to work well for our domestic market. When it comes to a possible referendum on EU membership, the lesson from last September’s poll on Scottish independence is that markets do not pay any attention until just before the event.
So in summary, short term, we can put away our overcoats, wellies and scarves and continue to enjoy the improving landscape and stable weather, but, a word of caution, don't go the whole hog and don the flip flops, shorts and t shirts just yet, as the long range forecast is much more unpredictable and it may be wise to keep the umbrella handy.
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