At less than 100 days away, the 7 May vote by nearly all accounts will be a tightly fought race between Labour and the Conservatives with an unprecedented importance played by smaller fringe parties, making its outcome and effect on markets very hard to decipher.
This uncertainty has led many of the UK’s most highly regarded fund managers such as FE Alpha Managers Neil Woodford and Mark Barnett to warn that the spectre of change will ramp up volatility. Star manager Richard Buxton has also warned that investors should not expect much from the UK stock market over the coming months.
The £23.1bn Standard Life GARS fund – one of only a few funds to receive more than £1bn of inflows in 2014 after taking close to £2bn in new money – had a relatively high long exposure to UK equities at the end of last year but has stripped back exposure and increased positions that will benefit from a weak sterling.
Rudd, who is one of the senior managers on the fund, says the team started to take steps to prepare for political risk in the run-up to the Scottish independence referendum last year but says this preparation encompasses this year’s general election.
“We are set up to withstand any of the scenarios that we envisage. One of the things we do is to look at all historical scenarios to see what would happen if it were repeated [with positions as they are], with no more than half of global equity drawdown,” he explained.
“We also do forward-looking scenarios looking at things such as an escalation of the Russia vs Ukraine stand-off. Another is a China crisis such as a credit problem. Under any of these scenarios we have made sure that the fund will behave as we would want it to.”
Rudd expects the biggest impact of the general election to be on currency, with sterling weakening further having already fallen since the Scottish referendum in September as the graph below shows.
Performance of sterling vs US dollar since September 2014
Source: FE Analytics
“UK equities could also be affected although it is unlikely to have much effect on global equities so what we have done in the portfolio is to have a low position to UK equities. Our UK equity beta is only 1 per cent of the fund, which is lower than it had been toward the end of last year,” Rudd said.
The sentiment echoes that recently expressed by Standard Life head of global strategy Andrew Milligan, who said last week that the fund house was broadly concerned about the effect of the election on its largest holdings as a group.
“The domestic non-financial, non-supermarket earnings outlook is looking quite positive at the moment. We a seeing notable expansion in employment and real income growth which is feeding through to consumer spending and business services,” he said.
“However, in the FTSE 100 certain swathes such as oil, energy, supermarkets, perhaps utilities depending on the election outcome, do face some significant earnings pressures.”
FE Analytics shows GARS has outperformed the average fund in the IA Targeted Absolute Return sector over one, three and five years.
Its five-year return is 35.74 per cent – slightly more than double the sector average - although its volatility over the period is 4.14 per cent against the peer group’s 2.30 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
Brenda Kelly, chief market analyst at IG, says investors should be betting on a hung parliament following the election.
“What is already clear from the polls, however, is that even if one party emerges with a majority, it is likely to be a slim one. A hung parliament, the second in a row, is the most probable outcome, with the winner needing to put together a coalition to provide a stable platform for government. Unlike in 2010 however, that coalition may not just be à deux, but a cobbling together of a number of different interests,” she said.
“Recent polls from YouGov, ComRes and Survation have all put the Conservatives ahead, but not by much. The overall picture is unclear, as both Labour and the Conservatives lose votes to fringe parties; in the latter’s case this means UKIP, but for the former it could mean the Greens, the SNP or Plaid Cymru.”
“As the time to the UK’s election ticks away, the current betting points to a hung parliament result, with ‘no overall majority’ currently on a 75 per cent chance of being the outcome. The next closest is a Conservative majority, but this is currently rated at just a 14 per cent chance by IG clients, compared to an 11 per cent chance for a Labour majority.”
