While several FE Trustnet readers don’t seem to agree, leading industry experts have warned that the building political uncertainty in the UK will have a negative effect on sterling and the stock market – one example being FE Alpha Manager Luke Newman, co-manager of the five crown-rated Henderson UK Absolute Return fund.
Newman and co-manager Ben Wallace are in somewhat of a privileged position compared with many of their peers as they have the ability to make money from both their long and short positions, an approach that has enabled their strategy to deliver a 209 per cent return since launch in 2004. The FTSE All Share has gained 136 per cent over this time.
While Newman has warned that there will be political induced-volatility in the UK market over the coming year, he says it could be a great time to be a long/short manager.
“I think the biggest opportunity will be if there is a change of government,” Newman said.
“Leaving political party thoughts aside, I don’t think it is contentious to say that in capital markets’ minds, a change in government from the current ruling centre-right Conservative party to what used to be the centre-left Labour party – which if policies are to be believed has moved slightly further to the left – would be the biggest concern.”
As a result, Newman has highlighted the areas of the UK market he will short and buy if Labour wins a majority or leads a coalition government.
Short energy, government outsourcers, transport and bookmakers
“It’s not too difficult to work out how we will make money on the short side if that happens,” Newman said.
The FE Alpha Manager adds that as Ed Miliband has been very vocal about his plans to reform the energy market, electricity suppliers would be a good hunting ground for short-sellers.
Investors may well remember the fall in Centrica’s shares when the Labour leader announced plans for a freeze in energy prices to “mend the broken energy market” – which sparked a backlash from some of the fund management industry’s biggest names, such as Neil Woodford.
Performance of stock versus index since Sep 2013
Source: FE Analytics
According to FE Analytics, shares in the FTSE 100 company have fallen by more than 30 per cent since Miliband made his comments in September 2013.
Newman also expects to make money shorting other areas of the UK market as a result of Labour’s plans to give people a “fairer deal”.
“Government outsourcers would come under pressure and transport companies through tighter regulation of bus and rail fares again would suffer in share price terms if there were to be a change of government,” he said.
“Also, bookmakers. We are seeing proposed regulation of betting machines, which would be significant for traditional bookmakers such as William Hill and Ladbrokes.”
Buy challenger banks
Newman says it has been much harder to ascertain where he and Wallace can make money on the long-side if there were to be a change in government.
However, after a great deal of research, he and Wallace have identified three areas that he thinks will benefit – starting with challenger banks. He already owns the likes of Virgin Money, Aldermore and Paragon (which have all floated within the last 18 months) in his portfolio.
“They have come to the market without a lot of the baggage or problematic backbooks of the incumbent banks, but also come with much lower market shares,” Newman said.
“If you listen to the politicians, the focus appears to be around bankers’ bonuses, but also on market shares. I think a Labour government will look to impose hard market share caps on incumbent banks.”
Miliband has vowed to create more competition within the banking sector and his comments in January last year on a “reckoning” with the major players caused shares in the likes of HSBC, RBS, Lloyds and Barclays to fall in value.
Performance of stocks between January and June 2014
Source: FE Analytics
He added: “Leaving aside how difficult that would be to impose, I think the stock market would panic early, so we have built a pair trade looking to be long some of those challenger banks against short positions in some of the incumbents who could well come under pressure.”
Buy housebuilders
“UK housebuilders are a more contentious conclusion. It’s tempting to say that after a very strong recovery in the shares of housebuilders, a change in government would be problematic – but I would disagree,” Newman said.
As a result of the economic recovery and the Help to Buy scheme, investors in UK housebuilders such as Barratt Developments, Persimmon and Taylor Wimpey have witnessed stellar returns since the start of 2013.
Performance of stocks versus index since January 2013
Source: FE Analytics
Although some analysts are concerned that these stocks would be in for a rough ride due to the economic side-effects of a more interventionist Labour government, Newman says that certain businesses within the sector would benefit.
“I think the focus would change,” he continued.
“In the UK we have seen a dual-track two-tiered housing recovery, with London really enjoying safe-haven status. It has seen capital flight from around the world and, on any pricing metric, the 2007 highs have been cleared comfortably.”
“And yet, we have seen a very sluggish reaction outside of London, with very low volumes.”
The FE Alpha Manager says Labour’s response to the situation would be very similar to the policies pursued in the US – which encouraged housebuilders to build more properties and the financing of these homes, particularly for first-time buyers.
“Housebuilding is one of the biggest multiplying-effect industries there is. It is a big job creator with very low imports so it’s a fiscally astute way of stimulating the economy,” he added.
“If the government changed, the focus would be even more skewed outside of London and outside of the M25, and more at affordable entry-level houses. I think housebuilders such as Taylor Wimpey and Barratt Developments, which have very low-level London exposures, will do very well with a Labour government.”
Buy contractors
The final area Newman and Wallace have identified is infrastructure spend, as the FE Alpha Managers think contractors will be well-placed if Labour were to take office.
“The ruling Conservative party has adopted typical centre-right policies and tends to rely more on a monetary response rather than a fiscal one,” Newman said.
“I think maybe a shift towards a national infrastructure fund or at least a concerted effort to adopt a larger fiscal approach to government could lead to road projects, schools and hospitals being built.”
“Contractors such as Carillion and Balfour Beatty are potential beneficiaries of a change in government in the UK.”