Speaking this morning at a Schroders election briefing in London, Buxton said low expectations in the stock market create scope for positive surprise.
He said: “The UK economy is still likely to lag other economies in this global V-shaped recovery but expectations are so low in the stock market for the domestic and consumer related sectors that actually that is an area where I think there are tremendous opportunities to make money.”
Buxton said the market reaction to the gilt market will have a crucial effect on the equity markets and said an ‘early and aggressive’ approach to tackle the deficit would be supportive. He did not anticipate a doomsday scenario of substantially higher bond yields as they were likely to remain in line with nominal GDP of around 4 per cent for the next few years.
He said the political recognition that economic growth is vital to cut the deficit would encourage business friendly policies and huge incentives for corporates to stay domiciled in the UK.
Despite the tough outlook, Buxton said a shrinking public sector percentage of GDP would benefit the private and voluntary sector in areas such as IT and outsourcing which can expand into areas which the Government is contracting. According to the manager, events in 2012 such as the Olympics and the Queen’s diamond jubilee would provide a ‘feel good’ factor, helping offset some of the gloom in the 12 months ahead from higher taxes and reduced public spending.
He added: “As I have maintained by the time we get to 2012-2013 there will be ample scope for a government bank shareholding windfall which will allow us to pay down some of the debt through gains made.”
Schroders head of European and UK interest rate strategies David Scammell said a bad election outcome would be if the market is neither convinced that the incoming Government understands the seriousness of the fiscal problem nor has a credible plan to deal with it.
He said a Conservative victory would be a marginally better result for the gilt market but scarce information politicians have given on their policies do not suggest a great difference in cuts between the parties.
He said: “If you look at their five year plans there is only £8-10bn difference in cuts between the main parties, that is a minuscule amount and certainly in terms of the problems we are facing simply is not enough. What is important is not necessarily the run up to the election but the message politicians give once we get the results in how they will deal with the problem.”
Schroders UK chief economist Keith Wade said the most likely election outcome would be a Labour/Liberal Deomcrat coalition which is where there is greatest confidence in policies. He said: “I think we will end up with a change of Labour leader and probably Clegg and Cable both in the Cabinet.”