Investors shouldn’t worry about the UK’s in-out referendum on the European Union at the moment but the fact that many companies could face a blow from stealth taxes, according to Lazard’s Alan Custis (pictured). 
The head of UK equities can see positive and negative aspects of having a Conservative government, but is surprised by the bearishness that is still being seen in the market after Friday’s surprise election result.
“Not to decry journalists of course, but I thought reports were very, very cautious. It was all Brexit, SNP, and then the good news of Friday just tried to evaporate over the weekend. I think the market did become over-cautious,” he said.
Because of the trepidation felt by many investors ahead of the uncertain general election, particularly those who were overseas, many investors decided to wait for the election results before deciding whether to invest in the UK market.
As such, Custis believes that the market could see an influx of capital over the coming weeks, which would have a positive impact.
What’s more, he believes that the impending EU referendum promised by the Conservatives is not something that investors should be overly concerned about yet.
“If it does happen it won’t be until 2017, so if we start discounting that now I think that would be a bit premature,” he continued.
“I think it will make a lot of noise but ultimately we will stay within the EU. So the market may worry about it, but I think they’ll worry about it nearer to the time.”
In addition, the fund manager believes that discounts on sectors that became politicised in the election run-up, such as those that would have been probable targets of Labour government like utilities, gaming stocks and financials, could start to unwind.
“To an extent there have been concerns about further aggressive bank interventions and I think the likelihood of that is arguably less now than had a Labour coalition been in power,” Custis added.
“I think we will see a continued unwind of that discount as we roll through the year, so I understand and am completely onside with some of the sharp moves we saw on Friday. Yes, I think we’re in a period of consolidation but I think a lot of those stocks that had a 4, 5, 6 per cent lift on Friday will continue to make progress as we go through the year.”
The shock election victory caused the FTSE 100 index to rally and sent it hurtling towards last month’s record high after the 7,000 barrier was broken.
Custis, alongside co-manager Lloyd Whitworth, re-balanced the Lazard UK Omega fund slightly on Friday as soon as the result was announced.
“We tweaked financials and utilities – obviously we bought in both,” he said.
“What we saw in the run-up to the election was the market drop by about 5 per cent, but there are stocks that dropped significantly more than that into the election. I think it’s created a number of opportunities within the sectors.”
Markets became bearish on UK utilities following Miliband’s pledge to freeze energy prices if he came into power. Since the start of the year, the FTSE All Share Utilities index has underperformed the wider FTSE All Share by more than eight times, delivering returns of just 1.28 per cent.
Performance of indices since 2015
Source: FE Analytics
However, investors, including Custis, breathed a sigh of relief and bought back into the sector following Friday’s result.
Another positive that he now sees in the UK market is the prospect of outsourcing becoming a more favourable area for investors to focus on.
He said: “The government still needs to save money and the likes of the Capitas and the Hays have all flagged that central government and local government outsourcing slowed down in the run-up to the election.”
“I think there will probably now be a revised pick-up in appetite for outsourcing costs to the private sector, so I think that’s an area that investors can look more favourably on.”
However, there are potential headwinds that Custis admits could hinder UK investors. Firstly, he says that initial public offerings (IPOs) take the edge off of the market if they attract vast sums of cash.
“Although on the flipside, I think with interest rates and the debt markets where they are, even though they’ve moved up recently, M&A is still going to be prevalent as we move through this year, so that would be a supporting factor,” he added.
Another negative that can’t be avoided, according to Custis, is the fact that there are going to be further tax burdens on corporates.
However, it could be argued that Labour, the Liberal Democrats and the Conservatives all made a commitment to the Office for Budget Responsibility (OBR) to reduce the debt burden by 2020, meaning it was always going to be likely that tax rates would increase or new taxes would be introduced.
“Whichever government was going to come in, it was going to happen,” he said.
“I think that you could argue that the Conservatives have tied themselves up in more commitment in terms of what they’re not going to increase, which means quid pro quo they’re going to increase other things they haven’t talked about. I think there are going to be more stealth taxes – some of those are clearly going to fall on companies in a way that at the moment is quite difficult to calculate.”
“But, there’s 100 per cent acceptance that it’s going to happen because they’ve got to somehow reduce national debt, so we’re going to have to contend with that. Having said that, corporation tax is not going to go up – Labour were going to put corporation tax back up, so that’s a positive.”
In the midst of investors drastically altering their portfolios based on Friday’s result, Custis points out that the UK index is heavily reliant on overseas markets due to the large amount of multinational companies.
He says this could pose a serious problem if the sterling were to weaken. However, he believes that the sterling will probably behave far better under a Conservative government than it would have under a coalition.
In spite of this, he warned: “I think there will be some negatives, it’s just very difficult to predict what they’re going to be at this stage.”