With the general election no longer a lingering distraction, the focus should now be on how the UK’s stable political and regulatory environment is helping to provide a backdrop supportive for future growth.
In the run-up to the election in May, uncertainty and nervousness over a hung parliament, together with some perceived anti-business political rhetoric from the Labour party, deterred many investors from allocating to UK equities. But although the majority Conservative party victory was a surprise, the political environment is now set fair for many years to come.
The Conservatives have been supportive of investment and job creation thus far, not least through the bold move to reduce the corporation tax rate to 20 per cent from 28 per cent when the coalition government was formed. The rate is to move even lower, to 18 per cent, in 2020 and should give confidence to businesses that they can plan for the future and invest for the longer term.
While the current UK budget deficit of 5.5 per cent is still relatively large by historical and international standards, it is forecast to be eliminated by 2019/20 on the back of continued government spending cuts and structural reform.
This is in stark contrast to the US, which is forecast by the International Monetary Fund to run a wider deficit for the foreseeable future.
This ‘cut less, grow more’ strategy is contingent on the US economy outperforming and effectively outgrowing its debt obligations. The UK’s approach to cut the deficit more now offers greater reassurance and economic growth potential over the medium term and is more conducive to increased business investment and confidence.
The strong regulatory framework associated with investing in the UK is also attractive. In addition to the legal responsibility UK companies face, there is also a strong sense of corporate governance and ethics, as well as high levels of disclosure and transparency with regard to business activity and financial accounts.
While UK GDP has pointed to slowing economic growth over the past few quarters, there have been recent signs that the economy is improving. Growth has been affected by election uncertainty, the future of Greece in the eurozone and widespread disinflationary pressures. However, the latest IMF World Economic Outlook forecasts much-improved full-year growth for 2015 of 2.4 per cent, second only to the US in the G7 group of developed economies.
Business investment growth remains strong and household real incomes have started to realise the benefit of lower energy and food prices, which should see a rebound in consumption over the coming months. This should help inflation tick higher, back towards the Bank of England’s 2 per cent target, although this is likely to be a gradual process.
Other bright spots for the UK economy include the labour market, which has been consistently performing well. Unemployment dipped to 5.4 per cent earlier this year – second only to Germany in the EU – against a backdrop of improving real wage growth.
Volatile markets provide opportunity
There is no doubt we have seen increased volatility recently. In fact, I believe we will continue to see volatility for some time to come. However, short-term volatility can be used as an opportunity to buy companies with good longer-term valuations at cheaper prices.
Take BT as an example, which has been a significant holding of mine for several years. Even though BT is a domestic UK telecommunications business with no exposure to China, the stock fell broadly as much as the market in the week around Black Monday, as fears over the break-up of its Openreach infrastructure division coincided with general equity market jitters.
Having spent a lot of time with BT’s management team, however, I was confident in the company’s long-term outlook. With its strong balance sheet and cash generation, its planned acquisition of mobile network operator EE and its successful investment in TV sports content, we believe it is well positioned for ‘quad play’ – delivering the bundle of broadband, TV, home phone and mobile phone to its subscriber base.
We also believe the risk of Openreach being separated from BT is overstated. As the company’s dividend yield moved back up closer to 3.5 per cent, the August sell-off provided the perfect opportunity for us to add to our position.
Simon Brazier is manager of the Investec UK Alpha fund.