Comment: Election shadow fuzzy but getting clearer

A puzzle has increasingly preoccupied UK investors: why, as we look destined for political gridlock this Thursday and the prospect of political instability stretching well beyond, has the stock market failed to correct? Indeed, as measured by the FTSE 100 Index, it has been hugging new all-time highs.

Bill Jamieson. Picture: Ian Rutherford
Bill Jamieson. Picture: Ian Rutherford

Behind the puzzlement of the market’s apparent calm amid the political mayhem is a growing apprehension: that when the reality of the gridlock and its consequences become plain, the market will indeed experience a very sharp sell-off and with little to suggest any quick recovery from lower levels.

But should we be reassured instead by the resilience of financial markets in the face of such political uncertainty? There are certainly two silver linings to the clouds of political mayhem now directly above us. One is that the marked weakness in sterling that emerged last week should provide a useful fillip for UK exporters, particularly companies selling into the eurozone where policies of the European Central Bank have provided a prop to the single currency.

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And the second is that the political gridlock itself may provide a brake on the UK parliament’s ability to pass legislation. That means little scope for polices that may be harmful to business – either by way of higher tax or by the introduction of new regulation. However, the investor mood may be rather more apprehensive than the level of the FTSE 100 suggests.

It is not the best measure of investor confidence in “UK plc” because it is dominated by global giants which earn the bulk of their earnings overseas. The broader FTSE All Share may be the better gauge of UK investor confidence.

UK investors appear to be taking a cautious view as the election looms closer. According to the Investment Association, investors withdrew a net £1 billion from UK funds in March. The bulk of the withdrawals came from the UK All Companies sector, which saw outflows of £980 million. The result has been that this year’s “Isa season” failed to register sales as high as last year, despite the Isa allowance having risen to £15,000.

Jason Hollands, managing director of online stockbroker Tilney Bestinvest, says investors were likely to be worried about the election and fearing markets could soon retreat from their highs. “While some of this might be explained by resurgent interest on pensions, the bigger factor is likely to be mounting anxiety over market levels at a time when the news has been dominated by turmoil in the Middle East, a potential Greek exit from the eurozone and the uncertainty over the UK elections.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, says investors were staging a buyer’s strike before the election. “This is pretty par for the course, and the Footsie reaching a record high won’t have helped matters.”

The concern may be less the impact of a gridlocked election result than the recent signs of an economic slowdown.

Growth forecasts are now being shaded down and it may well be that we have entered a period of secular stagnation with limited opportunity for corporate earnings growth – whatever outcome prevails at Westminster.

Trust is sadly lacking at £2.7bn behemoth

Where now for Alliance Trust as the smoke clears from the climbdown last week and its agreement to accept two Elliott nominees to the board? Has the investment case for Alliance been strengthened or weakened?

It is hard not to conclude that the authority of the chairman and of its chief executive Katherine Garrett-Cox has been weakened. There is a strong suspicion that the board’s climbdown came in the wake of indications of an uncomfortably close vote: this in itself would suggest a marked loss of confidence in the existing management.

Shareholders have been appalled at the £3 million cost of the battle in PR, legal, accounting fees and printing costs. And little comfort has been drawn from re-iterated assurances of improvement round the corner for the Alliance Trust Savings trading subsidiary.

A goodly number of investors would prefer to see this bid to emulate Hargreaves Lansdowne sold off before it soaks up even more capital.

And in truth, it will be years before the trust’s new investment strategy focusing on socially responsible businesses proves its worth. Confidence in the ability of current management to bring about a quick and marked turnabout in the fortunes of this £2.7 billion behemoth is now indeed on a shoogly peg.