With the Conservative party losing the once-safe North Shropshire seat after two years of the Johnson Administration, Stuart Clark, portfolio manager at Quilter Investors considers whether the political headwinds that have held back the UK market since 2015 remain in place, and what this means for investors.
It is often said that the UK market looks appealing to investors given the relative valuation difference between the UK and other regions, where valuations have become more stretched. But there is a reason for this valuation differential. The UK has been beset with political uncertainty, largely since the 2015 general election in which our future relationship with the EU looked in doubt.
Now that the UK’s relationship with the EU has been agreed, it was hoped that the political uncertainly would lift. But this does not seem to be the case.
During Johnson’s time in office, the Conservative party has brushed off challenge after challenge and Johnson has maintained a strong foundation of personal support. This was true during the entirety of the pandemic, in which the Prime Minister led without too much of a hit to his personal popularity, even after Dominic Cummings fateful trip to Barnard Castle.
But things look a lot different now. The tide of public opinion appears to be turning after a series of damaging episodes for the Prime Minister. Add onto that a worsening Covid situation over the now not-so-festive period, and you get a tense political environment for the ruling Conservative party. No surprise, therefore, to see the Conservatives struggle at the North Shropshire by-election, but a Lib Dem victory is a big surprise and could be a sign of the political uncertainty to come.
As we approach the next general election, which is expected in 2024 but could come considerably earlier than that, battle lines between the two parties will be drawn. The Conservatives, fearing an erosion in their support base after a series of crises, may well swing further to the right and we cannot rule out a leadership challenge ahead of the next election. Labour will continue its repositioning towards the centre ground in most areas, with tactical ambiguity in others.
As a result, we still face a largely uncertain political environment in which the outcome of the next election is anyone’s guess. If it goes the Conservative’s way, then there is simply no guarantee for businesses that their interests will not be trumped by political aims. Likewise, if Labour win the next general election after 15 years in opposition, they will inevitably find the transition back to power challenging, and business could suffer as a result.
What should investors do?
As always, diversification remains the best strategy. While the cloud of political uncertainty may not have lifted in the UK, there is still a place for the UK market in investors’ portfolios. Coming to the UK’s rescue is the yields on offer. From an income perspective there is certainly a greater opportunity within the UK equity market than available in other developed equity or fixed income markets if investors are willing to take on that risk.
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