The UK electorate shifts to the right
Transcription
The UK electorate shifts to the right
FOR PROFESSIONAL INVESTORS ONLY The UK electorate shifts to the right Multi Asset Solutions | May 2015 SUMMARY The UK Conservatives have secured a majority in House of Commons, giving them the mandate to set policy as a single party government. Introduction: After a closely fought election campaign where the opinion polls indicated that the most likely outcome was another hung parliament the actual result has surprised political pundits and markets with the Conservatives now likely to form an effective majority government in their own right! The Conservative party has an effective parliamentary majority and can rely on support from the Democratic Unionists Party (DUP) with 8 seats and possibly the rump of the parliamentary Liberal Democrats with 8 seats. Macroeconomic policy: The previous Conservative led coalition government had planned a significant fiscal policy tightening following the election which would have focused primarily on public expenditure cuts and increased user charges. With this policy largely endorsed at the ballot box, a Conservative government is likely to implement most of its planned fiscal tightening of 5.3% of GDP by 2019/20. Overall this planned fiscal consolidation should temporarily dampen GDP growth and prevent a further significant deterioration in the UK current account position, which is already at 5.5% of GDP. In terms of monetary policy no party with the exception of the Greens has questioned the operational independence of the Bank of England (BOE) and the current inflation target of 2% CPI per annum. As such the likely fiscal consolidation under a Conservative government and it’s temporarily dampening effect on growth could force the BOE to delay the pace of monetary policy normalization. Despite unemployment being at its natural rate and signs that wages are starting to accelerate in some parts of the labour market. Microeconomic policy: Here the newly returned government is likely to continue its current policies of welfare reform aimed at pricing the long-term unemployed back into employment. Whilst such policy measures are likely to continue to lower the natural rate of unemployment they will not boost the recovery in UK factor productivity that the economy badly needs. Indeed it’s fair to argue that no party presented policies designed to tackle the UK’s poor performance in terms of total factor productivity improvements. An area in need of reform is both the private and public pension systems, which a Conservative government may start to tackle. Reform of the private DB system is necessary to reduce the pension liability of corporates, which is inhibiting their ability to undertake capital Flash note | May 2015 – 2 investment programs, whilst reform of the public pension system is necessary to reduce the UK’s long-term underfunded pension liabilities. Constitutional reform: The Conservative government will undertake a referendum on UK membership of the EU. However, with PM Cameron winning a majority in his own right, this should give him sufficient leverage over his own party to face down the more extreme euro-sceptics within his party. Therefore, he is likely to conclude a sensible deal with the EU over the UK’s relationship within the single market. But the very act of holding a referendum will cause some concern in financial markets over the next 12-18 months. This government would be committed to extend the devolution of powers from the Westminster parliament to the Scottish parliament. However, they are more likely to tackle the West Lothian question (Scottish MP’s voting on domestic English/Welsh issues whilst English/Welsh MP’s cannot vote on domestic Scottish issues as they are the preserve of the Scottish parliament) and so reduce Scottish representation in the Westminster parliament in future. Given the Scottish Nationalists success in Scotland and the Conservatives success in England/Wales the UK is likely to move towards a more federalist structure over the life of this parliament. Impact on sterling denominated assets: On average the reality of a Conservative government has tended to lead to Sterling appreciating against the USD by 6-7% over the 6 months following the election of such a government. In the run up to election the foreign exchange market seemed to be taking the view that increased fiscal spending of a Labour led government would force the Bank of England to tighten monetary policy, hence supportive of sterling. However, the reelected government’s fiscal consolidation should ease the pressures on the BOE to tighten monetary policy. This and the magnitude of the UK’s current account deficit is likely to lead to a depreciation of sterling. In terms of the UK equity market the likely impact is going to be more focused on differences in sector performances. The re-elected government’s noninterventionist instincts should boost energy and transport companies as the threat of price controls is eliminated. Additionally the Banking sector should enjoy a boost as an outright Conservative government is likely to be less aggressive on the bank levy going forward. Additionally, the headlines should abate about large companies relocating their corporate headquarters away from the UK. In the shorter term, the UK gilt market may experience boost from the election of an outright Conservative government given its commitment to aggressive fiscal consolidation. Longer term the UK gilt market is more likely to be influenced by developments in European and US bond markets. High-end residential property in the UK is likely to receive a boost as the threat to end non-domiciles privilege and the imposition of a mansion tax is eliminated. Similarly as the threat to impose rent controls on private landlords is eliminated the buy to let market should receive a boost. CONCLUSION The UK electorate have voted to end the coalition in the House of Commons, defying the opinion polls. The Conservative party have a clear mandate to set UK government policy over the next 5 years. Colin Harte Market Strategist, Multi Asset Solutions [email protected] +44 20 7063 7277 Flash note | May 2015 – 3 DISCLAIMER This material is issued and has been prepared by BNP Paribas Asset Management S.A.S. (“BNPP AM”)* a member of BNP Paribas Investment Partners (BNPP IP) **. This material is produced for information purposes only and does not constitute: 1. An offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. Any investment advice. Opinions included in this material constitute the judgment of BNPP AM at the time specified and may be subject to change without notice. BNPP AM is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the Financial Instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for a client or prospective client’s investment portfolio. Given the economic and market risks, there can be no assurance that any investment strategy or strategies mentioned herein will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the Financial Instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the Financial Instruments may have a significant effect on the results portrayed in this material. The value of an investment account may decline as well as rise. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes. *BNPP AM is an investment manager registered with the “Autorité des marchés financiers” in France under number 9602, a simplified joint stock company with a capital of 64,931,168 euros with its registered office at 1, boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832. www.bnpparibas-am.com. ** “BNP Paribas Investment Partners” is the global brand name of the BNP Paribas group’s asset management services. The individual asset management entities within BNP Paribas Investment Partners if specified herein, are specified for information only and do not necessarily carry on business in your jurisdiction. For further information, please contact your locally licensed Investment Partner.