Political instability is already having an impact on allocations to UK assets, according to Quilter’s latest Investor Trends survey.
More than two-thirds (69%) of fund groups said their appetite for gilts was being moderately or significantly shaped by recent events in Westminster, with 31% saying it was only slightly impacting their demand.
Should the Prime Minister be replaced by a more left-wing candidate, such as Andy Burnham or Angela Rayner, there was unanimity from fund managers that gilt yields would rise. There was also significant agreement (94%) that it would reduce business confidence, damage growth (50%) and reduce Labour’s chances of winning the next election (63%).
Separately, the research showed investors believe that gold continues to be a safe haven, with nearly seven in 10 (69%) fund groups identifying it as such despite recent volatility. Cash and US treasuries followed closely behind as the most popular safe havens. Quilter said the findings highlight that despite economic policies damaging the standing of the US with trading partners, demand remains for US assets in times of uncertainty.
Meanwhile, fund managers appear to have a lack of conviction in US mega-cap stocks, with only 19% of respondents expecting these companies to outperform the broader US market next year, while 38% believe they will underperform and a further 44% are unsure.
The majority of respondents also believe that consumers will pay the heaviest price for US economic decisions, with 59% believing that at least 60% of the cost of tariffs will be passed on to consumers and 19% expecting more than 80% to be passed on.
Lindsay James, investment strategist at Quilter, said: “Following their election win, the Labour Government heralded the return of stability to the top of UK politics. But as ever, drama is never too far away in Westminster. One thing is for sure, however, while fund groups want to see improvements from the current government to stimulate growth, the current alternatives do not seem appealing and as such allocations are being adjusted accordingly.
“Even if Starmer is to survive as Prime Minister, he may pay the price by pursuing more left-wing policies as a result. This too is likely to have a negative effect on markets, especially gilts, and the UK fiscal position is simply not strong enough not to consider the impact. With political volatility, economic volatility is often not too far away either.
“Looking more globally, and while events in Iran and the Middle East are clearly pre-occupying minds today, it is interesting to see gold retain its safe haven status despite the extreme price moves we have witnessed in the last 12 months. There also remains demand for US assets, although not all are loved as much as some, with the mega cap tech stocks coming under pressure given the high expectations and huge levels of investment from these firms.
“As recent events have shown us, diversification remains the best way to protect portfolios, especially with the sheer number of risks that appear to be lurking.”
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