Election result: What does it mean for UK equities?

Following today’s result we’re anticipating international investors, who have recently begun to re-allocate back to the UK, to move off the side-lines and materially increase their allocations which still remain at historically low levels.

Go to the profile of Anthony Lynch
Dec 13, 2019

Positive environment for equity flows

According to the latest Bank of America Merrill Lynch Global Fund Manager Survey, the UK equity market had become a consensual underweight for investors, but this turned sharply in November. This election result may add fuel to the fire for UK equity inflows, both from international investors, who are still typically underweight UK equities versus their benchmarks, and from domestic investors, who have been cautious. In the context of continued weakness in a number of global economic activity indicators, the UK may start to look increasingly attractive to asset allocators.

Our view is that the UK equity market also remains cheap relative to other markets. For example, relative to MSCI World, the UK trades at around a 35% discount on a blend of valuation measures.

Strong Sterling

While the performance of Sterling in the run-up to the election (+10% vs. the Dollar since August) implied that this outcome was already somewhat discounted by markets, a wariness of opinion polls meant many investors remained on the side-lines ahead of a conclusive result. 

Sectors to think about

Sterling strength is typically positive for UK importers (e.g. retailers and other consumer facing businesses) as their cost of goods reduces in Sterling terms. These businesses will also benefit from lower ‘imported inflation’, meaning household spending power increases; this could be met by increased consumer confidence and spending. The skill will be to identify which of these businesses can fully capture this tailwind, without the headwind of further market share loss to online retailers.

It is also a potential positive for labour availability (a recent drag on earnings for a number of leisure businesses). Overseas workers may be encouraged to come to work in the UK, although uncertainty over immigration policies post-Brexit may temper this. Furthermore, the trajectory for the National Living Wage poses an ongoing cost headwind, regardless of labour availability.

It is not just the retailers and leisure businesses that have suffered from weak Sterling. Car insurers (who have seen the cost of imported spare parts increase) and veterinary surgeries (who have struggled to find staff to meet demand) will, most likely, also be glad to see sterling strengthen.

On the other side of the equation are the exporters and foreign earners. While the foreign earners should see a one-time step-down in their Sterling reported earnings, many exporters have become sustainably less cost-competitive versus their international peers and will need to invest in productivity improvements to defend margins.

With a number of nationalisations now “off the table” sectors such as utilities, telecoms, mail and rail should revert to trading on fundamentals. But, for a number of these businesses, the fundamentals are not looking great. Any bounces in associated stocks may be short-lived.

What next on Brexit? 

A Conservative government, with a refreshed list of MPs, should mean getting Johnson’s deal through parliament become, in theory, little more than a formality at this stage. On that basis, the UK will leave the EU on 31 January 2020 and enter a transition period, with a view to negotiating a trade deal with the EU by the end of the year (which may in itself be a herculean task).

Anthony Lynch is portfolio manager of the JPM UK Equity Plus FundJPM UK Equity Core Fund & The Mercantile Investment Trust  

For Professional Clients/ Qualified Investors only – not for Retail use or distribution. This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy https://am.jpmorgan.com/gb/en/... is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a8278ac66

Go to the profile of Anthony Lynch

Anthony Lynch

Portfolio Manager, J.P. Morgan Asset Management

No comments yet.