Download Report

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.