Knowledge. Shared Blog

December 2019

UK Election Signals Inflows and Takeovers

Laura Foll, a Portfolio Manager on the Global Equity Income Team, outlines the initial reaction of markets to the clear Conservative majority in the UK election. She also looks at two key longer-term implications for investors in the UK equity market.

Key Takeaways

  • The UK election result may drive a rise in consumer confidence and the removal of nationalization risk for certain sectors in the UK.
  • The result may also lead international asset allocators to reassess their allocations to UK equities and potentially reverse markedly negative flows since 2016.
  • In our view, there is now increased potential for UK takeover activity, as the election removed some risk associated with the UK equity market.
View Transcript Expand

Laura Foll: The market reaction to the election results this morning has been broadly positive. So, the FTSE 100, the larger company index, and the FTSE 250 of medium-sized companies are both up, with the FTSE 250 outperforming, and that’s partly because sterling has risen quite strongly on the back of this result. And then if you look at the makeup of that index, the more domestically exposed companies – so this would be the likes of the house builders, utilities, the domestic banks – are outperforming the broader market.

If I think about why that’s the case, there’s a few different reasons. Firstly, I think, in the case of the banks, people are saying consumer confidence will go up following this result; this gives us a degree of certainty. I think it’s also saying that for some of the utilities, for example, the nationalization risk under a potential Jeremy Corbyn government is gone. So, there’s different reasons driving different sectors’ outperforming today, but broadly I think it’s consumer confidence and removing some of that nationalization risk.

If I think about the longer-term implications of this, I think they’re twofold. So firstly, if you go back to the referendum result in 2016, I wouldn’t underestimate how much money has been pulled out of the UK equity markets since then. It’s roughly 10% of all UK equities’ AUM [assets under management] that has gone since that 2016 result. And I think what other fund managers and other international asset allocators will be doing today is reassessing that underweight position and the amount of money that has been pulled out, potentially with a view to putting some of that back in, which I think is partly driving some of that positive move upwards this morning.

I think the second implication is for potential UK takeover activity. So we’ve already seen that pick up quite strongly this year, with the likes of, for example, Dairy Crest being taken out, the likes of Greene King, which is the pub operator. I think what this does is it removes some of the risk around the UK equity market, and if you were, for example, a U.S. company that had been considering buying a UK company anyway, this takes out one layer of risk. The Brexit risk remains, but the political risk is to a degree gone. So I think you’d be more likely to pull the trigger and make that takeover decision. So those are, I think, the two key implications that we are thinking about today.

    ABANDON YOUR DOUBTS,

NOT YOUR GOALS

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