We have already stated that we have reduced our exposure already to the UK stock market within our portfolios as we can envisage a prolonged bout of uncertainty as we approach polling day.
But as the clocks go forward and the evenings get lighter, our minds turn to the summer, and in particular the holidays therein. If one is venturing beyond the White Cliffs of Dover, will the election have any effect on how many cocktails one will be able to buy in one’s chosen destination?
We think it may. In our assessment, most outcomes look negative for sterling, at least until some semblance of certainty emerges from the ballot box. As we’ve suggested, the uncertainty leading up to 7 May is hardly likely to encourage overseas investment until a future path is clearer.
Should the Conservatives win outright, or lead the next coalition, there is a small matter of a referendum on the continuation of membership of Europe to contend with and, as we saw with the Scottish referendum, all kinds of scenarios are proffered as referendum day approaches and it is impossible to envisage anything other than foreign investment nervousness if this vote was to go ahead.
The outcome? A weaker pound.
Should Labour win outright, or lead a more left of centre coalition than the UK has experienced for many years, an increase in spending and borrowing looks inevitable which, with the UK structural deficit already the highest of any developed country other than Japan, would almost certainly lead to outflows from the UK gilt market.
The outcome? A weaker pound.
So if this election does look as though it is a lose/lose for sterling, at least in the short term, the message is clear. Go out and get your holiday money now, unless you have decided that the place to be in 2015 for a relaxing break is Russia or Ukraine, of course.
Last month we reiterated our intention to remain underweight the UK stock market in comparison to the US, Europe and Japan. The main reason for this was the forthcoming election, but there is another reason which is non-politically driven.
To date, our decision has been justified as over the past month the UK Equity Income Sector and UK Smaller Companies sectors have struggled to deliver a positive return whereas Europe, in particular, has been very strong. Another reason for the FTSE underperforming is the very make-up of the index.
A lot of investors (and many benchmarks) think that one should always hold a significant part of a portfolio in one’s native country. Reasons for doing so include familiarity and the lack of currency concerns on domestic returns.
However, if one lived in mainland Europe and followed a similar strategy, returns would be very skewed. Why? Because each market is made up of very different constituents in terms of sector. Switzerland, for example, has 35 per cent of its stock market made up of healthcare stocks, yet absolutely nothing in the energy sector. Norway, on the other hand, has 34 per cent in energy, yet absolutely nothing in healthcare.
If, as we do, you think that healthcare is a better sector than energy to invest in at the moment, what chance have you got of achieving outperformance if you live in Oslo and choose to overweight your exposure domestically?
If, as a UK investor, you insist on investing domestically, you will have to make a conscious effort to avoid the energy sector as it makes up 12 per cent of the index. Financials are even more dominant at 26 per cent of the index. If you think that financials are attractive as a recovery play however, Italy and Spain are the markets for you as their indices consist of 35 per cent and 37 per cent respectively of these stocks.
Our point is that it has been increasingly the case in recent years that national boundaries make less sense for forming a central pillar of one’s asset allocation decisions than deciding upon one’s sectors of choice.
Investors should, in our view, treat the UK as just another option in amongst numerous others rather than making the UK a central plank to one’s investment portfolio based upon nothing other than the fact that we’re British.
In a classic example of “on the one hand, yet on the other” we will now suggest that there may be opportunities emerging in some individual countries within Europe that may reward the more adventurous investor.
BCA Research have suggested last month that European equities have entered a “Goldilocks” phase (not, too hot; not too cold; but just right….for those who have forgotten that wonderful tale): “A drop in the Euro, a massive correction in oil prices and a quantitative easing by the European Central Bank have combined into a potent brew that should give growth a meaningful, though perhaps temporary, lift over the next two years.”
Good stuff, but if one has already missed the near 25 per cent rise in the German market year to date, is there a case for thinking that the European cruise ship has left without you? Perhaps not.
According to BCA’s research, the Mediterranean bourses of Spain, Italy and Portugal have lagged the core markets such as Germany and France by an aggregate 10 per cent since October 2014, despite the fact that these areas are on course to grow faster than the core of the Euro area this year. If Ireland could be relocated to sunnier shores, then they would come into this particular category too!
As a consequence of all that has happened in Europe since 2008, the recent fall in the euro has simply added ticks to the investment case boxes when the lower wages that are on offer now within many of the peripheral countries are included in making these regions highly competitive in comparison to how they were a few years ago. Memories tend to be long, however, so these markets remain unloved and underowned, yet actually trade “at some of the cheapest cyclically-adjusted price-to-earnings multiples in the developed world. With much-cheapened cost structures and a sustainable path towards structural reforms, this discount is unwarranted.”
Outstanding investment opportunities require an outstanding starting point. If you think that you’ve missed the boat in Europe, don’t worry. There may well be another one along in a minute, albeit with less of a robust look about it. Make sure that if you catch it, the lifeboats are easily accessible.
Andrew Merricks is head of investments at Skerritts. The views expressed above are his own and should not be taken as investment advice.