The FE Alpha Manager (pictured) has been selling down his exposure to the UK equity market following concerns that a new political leader could impose measures that would see the desirability of stocks plummet.
Although the UK stock market was reasonably flat across the course of 2014, the FTSE 100 was recently pushed to a new record high.
Price performance of index over 1yr
Source: FE Analytics
McQuaker said: “We quite liked the equity market but we weren’t all in because we thought we’d get a setback at some point. Usually when you get this transition from liquidity to growth, there’s a bit more volatility and it gives you a chance to buy things.”
Henderson’s multimanager team was expecting the market to transition from liquidity to growth in 2014 as central banks were tipped to begin to stepping away from their extreme monetary policies. Now, he explained, it seems that liquidity and growth are available simultaneously.
“This [phenomenon] doesn’t last forever, but we’ve got for a period of time in which two forces are acting together in a way which is quite beneficial for riskier assets within markets,” he said.
“One area that is quite interesting here is the UK, but there are two main issues here that trouble us.”
“The first is that you’ve got an election coming up which is extremely difficult to call, and that speaks to uncertainty. On top of that, it’s quite difficult to conjure up an election result that plays well with financial markets.”
The general election this year, which has been branded by the City as ‘the most unpredictable for a century’, has caused grave concern among investors.
Robin Geffen revealed to FE Trustnet at the end of last year that he has a zero per cent weighting to the UK in his Neptune Global Equity and Neptune Global Alpha funds due to concerns about the result.
He said: “I see ahead of us the most difficult general election in several generations, which has been further complicated by Alex Salmond’s determination to rip the heart out of Labour’s vote in Scotland. We have UKIP who will, despite what many pundits think, take seats across the board from all three major political parties and you get left with a serious political conundrum.”
“Markets don’t like uncertainty and there is massive uncertainty in the political landscape in the UK. Massive uncertainty.”
McQuaker, however, adds some more pressing contributing factors which could upset the UK equity market.
McQuaker explained: “If the Conservatives were to win, then the market has to conjure with the European referendum.”
He referenced last year’s Scottish referendum and the effect it had on the market. According to FE Analytics, the FTSE 100 rose just 0.60 per cent in the three months before the referendum, while global equities managed to gain 3.64 per cent.
Price performance of indices between 18 Jun and 18 Sep 2014
Source: FE Analytics
UK equities tended to sell off following opinion polls showing that a ‘yes’ vote would result from the referendum.
McQuaker added: “A poll that says we’re coming out [of Europe], I think, would be even more toxic than a poll that said that Scotland was going to leave the union. So that could create some short and immediate term issues.”
What’s more, the star manager believes that there is an even greater challenge that the UK market will have to face.
He said: “If certain parties are to remain true to their yet-to-be-published manifestos, they intend to restart austerity with a vengeance.”
“They’ve tried to spin it as though it’s just one final round of austerity and it’s done, but that’s not true. The truth is that they have got a package of public spending cuts in mind, or at least they appear to have, that are really quite significant in size.”
“As we’ve seen with Europe and the UK before we postponed austerity, changes in fiscal policy seem to have quite a big impact on economic growth.”
“I think the markets will probably feel happy for a little while if the status quo is confirmed and we go on as before, but these are not trivial matters, and this could raise their heads quite soon after the election.”
According to FE Analytics, McQuaker’s £82.9m Henderson Multi-Manager Diversified fund has been the third best performing portfolio in the IA Mixed Investment 0%-35% Shares sector in the last five years.
Within the same time frame, the fund boasts a top decile total return of 42.11 percent, outperforming its average peer’s 29.04 per cent return.
The team’s strategy of selecting specialist funds from sectors that display low correlation to one another ensures that the portfolio is well-diversified. The fund fell much harder than its peers in 2008, however, although performance has tended to be stronger since.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Psigma Investment Management’s Tom Becket, however, believes that a reservation towards UK equities could be misplaced.
He told FE Trustnet: “My view is that the UK election doesn’t really count much for the vast majority of the UK market and, in fact, an unstable or uncertain outcome for the UK election could actually be very good for the UK market because a lot of earnings from UK-listed companies are international.”
“So, if you have a weak pound reflecting a weak government or an uncertain political backdrop, then that could actually be very good for the translation of international profits back into sterling.”
“Perversely, I take the opposite view to Bill McQuaker: I would say that, yes, political uncertainty is bad for the UK-listed domestically-focused companies. But, for the rest of the companies, I would say it’s pretty positive and I think the election could be a bit of a sideshow for the UK equity market.”
Becket explained that an uncertain outcome followed by a resolution after the election could also be beneficial for domestic companies and small-cap equities in particular.
On the other hand, McQuaker explained that consumer confidence is another contributing factor which is knocked near election times.
He said: “If you look at consumer confidence in the UK and centre it on general elections, it’s always negative, interestingly. When you get closer towards the general election then consumer confidence improves.”
“The day of the general election, it’s typically peak consumer confidence and once the general election is out of the way, consumer confidence deteriorates.”
Despite his gloomy prognosis for the equity market and consumer market in general, he still has hold of some large-cap UK funds led by experienced managers.
In an article next week, FE Trustnet will be looking at these funds, which McQuaker believes can steer investors through the toughest of times.