The UK’s political situation has hampered investment sentiment towards domestic stocks for much of the recent past, but Invesco managers believe this could be about to change.
The Brexit referendum in 2016, a revolving door of prime ministers in the years since and the widespread expectation that the Conservative government is now destined to lose the next general election means politics has done little but add to uncertainty around the UK.
However, a note from Invesco’s James Goldstone, Jonathan Brown and Graham Hook said: “Contrary to the doom-mongering that still pervades so many headlines, we believe the picture that emerges is encouraging. We argue that, far from being weakened, the case for UK equities is further strengthened.”
This view is based on two basic assumptions on what might happen in UK politics (which not everyone will agree with): that the current government is “too damaged” to recover in time for the next election and that the coming decade “surely cannot be as unstable as its predecessor”.
Goldstone, Brown and Hook highlighted a number of positives for the UK outlook, such as:
- The International Monetary Fund changing its forecast from a UK recession this year to economic growth;
- An improvement in relations with the European Union following the Windsor Framework and the chance of some “gentle reintegration” in areas such as finance and science;
- The UK joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which should open new markets for UK exporters and lead to cheaper imports of some goods.
“All this constitutes a more promising state of affairs than the prevailing narrative frequently implies,” the Invesco trio said.
But despite this, they doubt that the Conservatives will have enough time to convincingly demonstrate the effectiveness of their economic policies before a general election is called in 2024.
Although prime minister Rishi Sunak and chancellor Jeremy Hunt will likely promise tax cuts to win over voters, the Invesco managers believe that a Labour majority or a Labour/Liberal-Democrat coalition has the better chance of winning.
“Would this herald a seismic shake-up from an economic and investment perspective? In other words, would Labour do things conspicuously differently?” they asked.
“On balance, probably not. Although a key lesson of the [Tony] Blair years was that an incoming government should try to achieve as much as it can while it still enjoys popular goodwill, it is unlikely that a Labour victory would bring the sort of sweeping upheaval that could translate into a sizeable and detrimental impact on the markets.”
They noted that Labour has already stepped back from its nationalisation policies, despite calls for water companies after the troubles that hit Thames Water earlier this year. Shadow chancellor Rachel Reeves stated that nationalisation “just doesn’t stack up against [Labour’s] fiscal rules”.
While there could be an increase in the bank levy, substantial banking reform looks unlikely under Labour as the party has insisted that keeping the UK’s financial services sector competitive will be “integral” to enhancing prosperity.
Finally, a Labour government would likely maintain plans to transition to a sustainable economy. The party has suggested US-style public-private investment scheme for a “green revolution”.
“On the whole, UK markets have now been a subject of negativity for seven years. In many arenas, particularly much of the mainstream media, this pessimism shows absolutely no signs of relenting,” Goldstone, Brown and Hook said.
“There is little to be gained from poring over whether such a woeful portrayal has been merited at various stages during this period. We can only ask whether it is deserved today – and we are firmly of the opinion that it is not.
“While Brexit has been a drag on the performance of UK equities since 2016, the doomsday scenario that many ‘experts’ prophesied has not materialised – and in many ways the UK’s political situation now looks more stable than it has for some time.
“Whatever it might be, even the outcome of the forthcoming general election should not bring a renewed sense of gloom. A change of government appears likely, but this need not mean radical economic disruption.”