UK election 2019: The Morningstar View

-- | 16/12/2019

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Holly Black: Welcome to the Morningstar "Market Reaction." I'm Holly Black. With me is Mike Coop from Morningstar Investment Management. Hello.

Mike Coop: Hi, Holly.

Black: So, we've woken up the morning after the night before with a Conservative majority government. What does this mean?

Coop: Well, you saw from the market reaction, there's an instant relief, the pound rallying, UK equity market rallying, and that reflects a lifting off some of the uncertainty about what's going to happen with Brexit. The majority allows this administration to make Brexit happen. There's going to be no second referendum. And it also means that there's less pandering to extremes in the party. So, a hard Brexit seems much less likely. And those things have lifted the uncertainty and therefore an expectation that people or companies can invest more, and that will stimulate growth along with the increased spending that the government has indicated it's going to be doing.

Black: So, there is kind of a euphoria this morning, the pound is up, the FTSE is up, the 250 very briefly touched a record high. But the job is not done yet. There is still uncertainty.

Coop: Yeah. So, I think, on those points, you know, clearly the parts of the economy in the market that are going to be most impacted by Labor's manifesto. And the highlight of that was probably the utilities that were looking to be nationalised and certain sectors of the economy where there will be much more government involvement, including the 10% that was muted in terms of, you know, effectively making that part of the government controlled stake of companies. That's gone away. So, there's been some pretty significant stock moves on the back of that.

In the background, though, we still have to contend with several years of negotiation with the EU. It's not clear exactly what that will look like. In the meantime, we're going to have this fiscal stimulus, people are going to be looking at that and investigating that and seeing what it means. But we are going to have a prolonged period of uncertainty. So, there has been a move up in the pricing of UK assets as some of those risks of extreme downside scenario have been removed. But there's still a case of significant uncertainty that investors are going to have to deal with.

Black: Well, how do they deal with it? That is the question. What do we do with our portfolios?

Coop: That's a very good question. So, it's pretty clear that no one has got a crystal ball that works. Valuation generally is your best guide to assessing what kind of scenarios are already priced in. In our own case, we had thought that the pound below 120 against the dollar was very cheap and we wanted to protect our portfolios from a rise. It wasn't really based on a view about what would happen with Brexit. It was more what was priced in. And similarly, on U.K. equities, they have been heavily out of favor because of this uncertainty, and we thought that that made them relatively more attractive. So, valuation is your best guide in these situations of uncertainty.

Black: And could this be a good time to be a value investor? The style has been very out of favor with all of those domestic UK stocks. Could we see a turnaround now?

Coop: Well, it's quite possible and certainly, some of the stocks have been affected because of the Labor manifesto. You've seen significant bounces in those. I think worldwide you get these trends of value and growth and the U.K. is already tied up and part of that. So, I don't think the UK election is going to change that. But a stronger growing economy means that people might look more closely at stocks that would typically be regarded more as value than growth. And so, it wouldn't be surprising if that happened.

Black: But I guess the key thing is, it's about looking ahead for the long term, because if this year has shown us anything, it's that you cannot predict what's going to happen next.

Coop: I think that's the key takeaway. And that's why we think valuation is the way to deal with that.

Black: Well, thank you so much for your time.

Coop: My pleasure, Holly.

Black: And thanks for joining us.


This report appeared on 2022 Morningstar Australasia Pty Limited

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