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Poll swings

It is not just the main political parties which stand to win or lose in the general election now called for May 6, Samantha Downes asks how UK equities will fare following the most anticipated Parliamentary contest in recent years

The general election called for May 6 has as much potential to boost as to depress the UK equity market.

The most damaging election result to the markets is widely regarded as an uncertain one. A hung Parliament is considered to the worst possible scenario. After the general election of 1974 which put Edward Heath in charge of a minority Conservative Government the FTSE fell by 18 per cent.

James Lowen, co-manager of JO Hambro Capital Management’s UK equity income fund says certainty is more important than party politics.
The outright 1992 Conservative victory – where there had been fears of a split vote – sent shares soaring by 13 per cent.

In the years since John Major’s victory, markets and currency have become more globalised, so, to some extent, the outcome of the election is irrelevant in the long term. With some investment banks predicting a 30 per cent chance of a hung Parliament, it may need to be.

Mr Lowen says: “Even if there is a hung Parliament, you have to remember that 70 per cent of earnings made by British companies are earnings made overseas.” He points out BP, HSBC and GlaxoSmithKline all make most of their profits outside the UK.

In fact, he says a hung Parliament could weaken sterling even further and make British-made goods even more attractive than they are.
He says: “Such is the perceived weakness of the British economy and UK companies that a hung Parliament has already been priced in, so any election outcome would immediately spell a repricing of many equities.

“You could say the remaining 30 per cent of earnings – the ones made in the UK – have been priced with a hung Parliament in mind, so they are attractive, in that valuations are cheap.”

Other fund managers believe that some sectors will stand to gain, regardless of which party wins control.

Paul McGinnis, head of research at Co-operative Asset Management says public sector productivity in the decade from 1997 grew by 3.4 per cent compared with 20 per cent in the private sector. Because of this, he claims public sector productivity will be high on any incoming Government’s to-do list.

McGinnis, says: “Swift action is necessary and we believe those outsourcers with a diverse business model and already strong relationships with Government bodies have most to gain. Mitie is one company in the sector that is particularly well placed.

“Outsourcers contract on the basis they will maintain, and even improve, service levels while delivering cost savings of up to 30 per cent.
McGinnis says not all outsourcers will make good investments. Companies able to improve the efficiency of existing operations and that have little exposure to current stalled big projects will benefit most.

It is not just the main political parties which stand to win or lose in the general election now called for May 6, Samantha Downes asks how UK equities will fare following the most anticipated Parliamentary contest in recent years

Lowen adds that some outsourcers such as Capita are already fully valued. He says: “We are looking at companies such as engineering consultancy WSP Group, its price to earnings ratio was seven times compared with Capita’s which had an 18 times price to earnings ratio.”

Lowen says his fund is not sector-specific but is looking at companies with a supply-side dynamic.

These are companies operating in sectors which have suffered from the recession but, because of their size and market dominance, are benefiting from the loss of competitors.

He points out the example of tour operator TUI Travel – owner of the Thomson and First Choice brands – which has seen competitors go under. “Already, holiday prices are up by 9 per cent on last year, because there are fewer operators. Majestic Wine is another example, it has seen large rivals like Threshers go under and has made inroads into some of that business.”

Andrew Milligan, head of global strategy at Standard Life Investments, says it is too early to tell what the election will spell for UK companies.
He says: “This is a key conclusion from any election analysis, that the make-up of fiscal policy afterwards – and there will be some very considerable changes – will have important company or sector effects, for example, whether there is more pressure for outsourcing by parts of Government or how variable tax increases affect different parts of consumer spending.”

David Clark, manager of the Ignis UK smaller companies fund, believes that after the election there will be a renewal of takeover fever and that small-cap stocks operating in niche markets will benefit from companies seeking growth through acquisition of smaller rivals.

He says: “Even Tesco and the major food retailers may struggle to add top-line growth. The pharmaceutical majors, Glaxo and AstraZeneca, have few products in the pipeline and their existing patents are running down.

“The oil majors have headwinds of their own. BP and Shell are spending vast sums on exploration with no guarantee of finding new reserves. They are also investing heavily in renewable energy that will not feed into the top line in the near future.”

Regardless of sector, or company, a post-election share rally will rely on the confidence of investors and Lowen says many are waiting on the sidelines.

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