The UK’s political backdrop is set to be the biggest threat to investment returns in 2015 claims Rathbones head of multi-asset investments David Coombs.
While last year turned out to be a winner for UK equities, 2014 has significantly failed to keep up, with the index up just 2 per cent year-to-date., This compares with the previous 12 months 19 per cent run – and Coombs remains bearish as the market heads into 2015.
He says: “In trying to figure the health of the UK economy, we found ourselves returning to the same place – politics. We believe the Bank of England’s decision-making process has become increasingly influenced by the political outlook.”
In addition, Coombs highlights that the combination of low demand and booming risk assets have caused corporates to use capital for market speculation at the cost of much-needed investment.
“This has clear implications for productivity and potential economic growth,” he adds.
The consensus has already forecast that a Labour Party victory in 2015 would be negative for certain sectors and UK markets in the short-term. However Coombs adds that owing to interventionist policies, the prospect of an in-out EU referendum under a Conservative-led government “has even greater implications for UK equities, and the City of London as a global financial hub”.
While Coombs acknowledges that fiscal tightening post-election is inevitable, regardless of the winner, and will most likely come in the form of tax increases.
He says: “This, along with fiscal tightening and rising rates occurring simultaneously, are likely to have negative implications for UK consumer discretionary earnings in industries such as retail and leisure. We have remained underweight the UK and sterling versus the US dollar on an 18-24 month view. Throw in the very real prospect of a hung parliament and the possibility of two elections, and everything points to a turbulent time for UK assets and, more specifically, for domestic companies.”
In contrast, the US remains the multi-asset manager’s favourite market going forward. After hitting new highs during 2014, the S&P 500 is now up a robust 20 per cent year-to-date.
Coombs says that while other economies continue to struggle, at least on a structural level, economic data suggests the worst of the US’s soft patch has passed. In addition, despite the market’s significant run, on a forward-looking basis, Coombs does not view the market as expensive.
He says: “It is the only market we believe will continue to benefit from a perpetual easing cycle in the form of sinking energy prices, declining rates and a strengthening currency. In addition, the lower oil price remains a big positive for the US economy’s stalwart – the consumer. Over the next 18 months or so, we see a combination of geopolitical factors causing considerable fluctuations in the oil price, most of which will be to the downside.”