UK investors are weighing up the potential disruption politics will have on their decision making in 2018, and it is not all about Brexit.
High-profile money managers such as Richard Buxton have expressed concern about the layers of reform the UK Government needs to take control of, including solving issues with housing supply and finding ways to boost productivity.
It has also been argued markets are not pricing in the possibility that Labour leader Jeremy Corbyn could succeed in the next election after the party saw a surge in support in the snap election in June.
Investec UK Equity Income fund manager Blake Hutchins tells Money Marketing he is not ruling out a political crisis next year. He also says the outcome of the ongoing Brexit negotiations will continue to influence Sterling.
Hutchins says: “A fragile minority government with a cabinet that is split on the preferred outcome for Brexit could prove to be problematic. The significant movements we have seen in the valuation of sterling continue to cloud the underlying strength and quality of corporate earnings.
He adds: “The changing state of Brexit negotiations and overall political instability is driving currency fluctuations. This in turn is driving market movements, particularly the relative fortunes of large corporates with overseas earnings and the more domestically focused smaller and mid-sized companies.”
Hutchins says stock selection will continue to be key next year.
The fund manager usually focuses on companies that are capital light, cash generative and that can support future growth in cashflows and dividends.
He also mentions businesses that have temporarily fallen out of favour, but can continue to improve cashflows, capital allocation and dividend growth. One of these firms is Unilever.
Hutchins says: “Having successfully blocked the takeover approach from Kraft Heinz, Unilever is continuing to transform itself from a food-dominated business to one focused on home and personal care. It is driving margins and cash flow higher through effective cost control and capital allocation, all supporting sustainable dividend growth.
“Elsewhere, 3i chief executive Simon Borrows has reduced risk and improved realisation returns from 3i’s investment portfolio, again supporting sustainable future dividend growth.”
Seven Investment Management fund manager Ben Kumar predicts 2018 will be another year where investors have to weigh up politics and economics, but he remains positive on the outlook.
He says: “Global politics is arguably in the worst shape we’ve seen for a generation. In 2017, equity markets dismissed the politics, and roared higher on the back of synchronised global growth. If everything stays in the same state, there is no reason why 2018 can’t be another successful year for risk assets.”
However, Kumar warns on other disruptors too.
He says: “If the world moves out of synchronised global growth, markets may view political rumblings in a less calm manner. Secondly, even if global growth does continue apace, the spectre of interest rate rises may begin to weigh more heavily on the bond markets. Can equities keep rallying if the bond market starts losing money in a serious way?”