20th May 2015
Richard Buxton, manager of Elite Rated Old Mutual UK Alpha fund.
A good general election result for the UK economy, but not a good day for the United Kingdom.
Firstly, it is clearly positive that we do not have to undergo days of uncertainty whilst a coalition government is negotiated. A clear mandate to govern for the next five years is constructive, whilst the narrowness of the majority guards against extreme policies.
The immediate reactions are obvious: the pound strengthened and the equity market rose, led by potential losers from a Labour government – utilities, bookmakers, banks and housebuilders. Given that a stronger currency represents a policy tightening and, more importantly, that the government remains determined to try to rein in the Budget deficit, the Bank of England will be in no rush to raise interest rates.
If there is some modest evidence that pre-election uncertainty held back activity in the UK through the first months of the year, then we would expect some rebound in the economy through the remainder of the year.
The scale of the Scottish National Party’s victory in Scotland, though, together with the scale of UKIP’s share of the national vote (at over 12%), confirms the extent to which we are an increasingly divided nation. The Scottish issue – and, inextricably linked, the English issue – is not going away as many hoped after the Scottish referendum, but will be a feature of the political landscape throughout the five years of this parliament. This may not be entirely positive for the Scottish economy.
As for the prospect of a referendum on the UK’s membership of Europe in 2017, this is not something to be feared. The new government has two years to negotiate with its EU partners some changes to the nature of Britain’s relationship with Europe. Germany has no wish to lose the UK from the EU, both as a financial contributor and as a free market counterweight to the statist model of France.
If the government is able to negotiate some meaningful changes to the UK’s membership of Europe, then the inherently conservative population – as so clearly evidenced by this election result – will overwhelmingly vote to stick with the devil they know inside the EU rather than leap into the unknown of a world outside it.
So a positive outcome for the UK economy, where the reality is that we have further work to do to reduce our indebtedness and overspending. A growing economy should enable that progress to be made. But a country most certainly not ‘at ease with itself’, in Sir John Major’s words. There is much healing work to be done.
As for the markets, the result is already old news. Back to the real issues of watching the Federal Reserve attempting the near-impossible task of gently nudging long yields and short rates higher, without damaging economic activity or precipitating a bond market collapse.
Let’s keep the UK government in perspective.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Richard's views are his own and do not constitute financial advice.