A clear winner?
By the time you are reading this article we will be well along the path to the long-awaited UK General Election or indeed may already know which party is to govern for the next four or five years. Earlier in the year we commented on how the prospect of a hung parliament might lead to paralysis on important economic decisions. Since then there has been something of a sea-change in that both major parties are now talking tough on deficit reduction, while the Liberal Democrats have won plaudits for being perhaps the most credible party on the economy.
Given the extent of the country’s economic difficulties, tax rises are probably inevitable whoever comes to power, while cuts to public sector spending will also be introduced in varying degrees. Much media space in the first few days of campaigning has been taken up with the debate over the rise in National Insurance that Labour plans and which the Tories, with the backing of an ever-growing band of captains of industry, say they would scrap. Meanwhile the respected Institute for Fiscal Studies is sceptical on the Treasury’s plans for achieving £11bn of efficiency savings, but it is similarly dismissive of Conservative claims to be able to find a further £8bn of, as yet unspecified, savings.
Whatever the size and scope of any cuts, it is clear that increasing taxation and reducing the size of the state will not in themselves be sufficient to get the UK out of the mire (although interestingly Ireland’s approach to its deficit has won it the respect of many economic commentators and it is no longer deemed to be quite such a basket case as, for example, Greece). Economic growth will need to be kick-started (remember GDP fell by around 6% in the recession).
One of the ways this might be achieved is by encouraging the private sector, the main engine of growth, to fill the void created by the forced retrenchment of the public sector. This could in turn create opportunities in areas such as the outsourcing of maintenance and services. Similarly, as financial services have retrenched, much has been made of the urgency of getting UK manufacturing back on its feet again. While it seems unlikely that it can be boosted to the 24% share of GDP that it enjoyed in the 1980s from today’s 12%, nonetheless it can be encouraged to grow. High tech and low carbon industries are also likely to receive a boost, as each of the parties seeks to prove itself the party of the future.
In all then, the picture is perhaps not so bleak as it may have seemed a month or two ago and it seems likely that throughout the election campaign share prices will ignore the daily opinion polls and the parties’ attempts to catch the media spotlight and chart their own course. By now most possible outcomes have been factored into investors’ decision making and market prices. Of course the currency and bond markets could yet succumb to some nervousness. An outright winner would be the best way to settle those nerves.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.