The mangers of the distribution funds at UK fund management giant Jupiter have dubbed next week’s UK general election a “brief sideshow”, arguing that the City is more likely to see an impact on financial markets due to Brexit negotiations, regardless of which party is in power.
Alastair Gunn & Rhys Petheram, co-managers of the Jupiter Distribution fund range said that the outcome of the general election vote will do little to ease uncertainty, as it is the negotiations on the UK’s exit from the European Union that are “hanging like a sword of Damocles over the markets”.
“A decent majority for the Conservative party of 50 plus seats may produce a short-lived rally for UK stocks while more dramatic swings might be expected in the event of an unlikely Labour victory, but Brexit would continue to cast a pall”, they said.
“Sterling is having a tough time as polling day in the UK draws closer, amid evidence that the Conservative lead over Labour is shrinking, the fall in the pound reflects concern the party led by Theresa May may not quite achieve the overwhelming majority it needs to play a strong hand in the Brexit negotiations – this, at a time when the UK economy is showing signs of slowing down.”
The fund managers pointed that instead of the 100 plus majority some thought the Conservative party could achieve, markets are “clearly pricing in something more modest”, potentially a majority of around 50 seats, or even lower as Labour continue to erode the Conservatives lead in the opinion polls.
“The damage, in our view, is somewhat self-inflicted,” the mangers said. “The Conservative manifesto is unusual in that it includes little in the way of policies that would usually appeal to the party’s traditional heartland.
“It has left open the possibility of tax increases and its proposal to make the elderly pay for their own social care seems like a serious misstep.
“The Labour Party under Jeremy Corbyn, (pictured left), has, on the other hand, delivered a manifesto that has direct appeal to its core voters. It will likely galvanise the Labour leader’s supporters, and ensure a high turnout in his favour on election day.
“In short, we are now set up for a tighter race than might have been expected at the beginning of the election campaign,” they said.
And with Labour slashing the Conservatives lead in the opinion polls from 23 points a month ago to just 3 points according to the latest YouGov polls, the prospect of a previously unlikely Labour win is something that the City is beginning to take seriously.
In the event of a Labour party victory, the direction of sterling is less clear, than it would be under a Conservative victory, where, the Jupiter managers add, that an uplift in its value is expected.
Jeremy Corbyn as UK prime minister could see a “Trump effect”, they point, where the likelihood of increased government spending takes pressure off the Bank of England, pushing short interest rates higher on the expectation benchmark interest rates will also start moving up sooner than initially thought – such a move would likely strengthen sterling.
Although, as a counterbalance, potential inflationary pressures linked to Corbyn’s policies, and general uncertainty on how a Labour government might proceed would likely weigh, they said.
“And therein lies the problem, in our view,” they said. “It is not clear how Jeremy Corbyn is going to generate the additional tax receipts to balance the extra government spending he envisages.
“Labour has pledged to raise tax on high earners, but history tells us that the hoped-for additional revenue often doesn’t materialise as people re-organise their finances to shield their earnings. This is what happened when the former Chancellor George Osborne took the top rate of income tax to 50% from 45% – tax receipts did not go up significantly.”
As for Labour’s plans to raise corporate tax, the mangers add that such a move might prove counterproductive at a time when we are preparing our exit from the European Union. In the current environment, they feel that there needs to be an incentive for businesses to continue to relocate here, and raising corporate tax does not, in their view, send the right signal.
“Talk of implementing a financial transactions tax is similarly unhelpful given the threat Brexit poses to the country’s financial services industry,” the managers added.
“For business, and for us as investors in UK business, the key focus for both parties should be to lay out a roadmap to help navigate the potential minefield that is Brexit.
“We believe that a hard Brexit, where we are no longer in the customs union, is the likely outcome of any negotiations led by a Conservative government that has been returned to office. The sooner we know what the rules of the game are for future trade with the rest of the Europe, the better it is for everyone.
The recent wave of populism that has seemingly engulfed many Western developed nations has, the managers said, been a “deeply de-stabilising” factor for business.
“Whichever party wins power, they would need to create a narrative that is more constructive around business and that involves creating a framework that is going to make the UK a more attractive place to do business,” they said.
“Would the Labour party be in a better position to create such a framework in the event of victory? Unlikely. On Brexit, a new Labour government would be starting at square one. They would, in our view, have even less time to negotiate a good deal for the UK than the Conservatives even if they were able to take advantage of all the hard work already carried out by the civil service to prepare for the Brexit talks.
“The best we could hope for would be a decent transitional deal, and we believe, that is also the likely outcome of any Conservative negotiations, although one would hope that Theresa May’s party is a bit further down the line when it comes to understanding what they hope to achieve,” the managers concluded.