Janus Henderson: A global equity income perspective

(Foto: Ben Lofthouse, Fondsmanager)

The UK General Election outcome is less conclusive than the polls suggested. As expected the Conservatives will be the largest party, but they have fallen short of an overall majority and will likely need to work closely with the Northern Irish Democratic Unionist Party. In Scotland the significant reduction in the number of Scottish National Party representatives in Parliament may lower the likelihood of a second Scottish referendum. The result is not a rerun of Brexit, but does highlight the divisions within the country regarding the approach to it. 

Currency implications
The biggest short-term impact on business will be the effect of currency movements. Sterling has weakened, which should improve the competitiveness of UK exports, and the profits of overseas earners are likely to be revised upwards. On the negative side input cost increases will affect some industries. The best opportunities for investors may come from international businesses listed in the UK and Europe that are sold off with the market, but where trading will not be impacted by the decision and which may benefit from currency weakness. A significant proportion of the team’s Global Equity Income strategies are invested in these types of companies. There may be short-term volatility in these share prices but we expect them to recover.  

Domestic UK stocks are being sold off in the immediate aftermath of the result. Many of these have rallied significantly since Brexit last year, and some profit taking is expected. While there may be pressure on these areas (retail, housebuilding and financials) as the result is digested, in the long term the fundamentals are likely to reassert, such as housing shortages in some regions of the country or restructuring activities by management teams. 

On the Global Equity Income team we did not take a speculative view on the outcome of the election, therefore, we did not need to take any action in the portfolios we manage as a result.

Longer-term implications
The longer-term implications of the result are very hard to judge. There does not seem to be a suggestion that voters are rejecting the idea of Brexit; it is more that voters see the decision on Europe as having being made and they therefore voted based on domestic policies they favoured. The outcome may push negotiations on Brexit further out, but some commentators say that it could help avoid a ‘hard Brexit’. Either way, it highlights the unpredictable nature of political events and reconfirms the importance of diversified portfolios and caution around making assumptions on binary outcomes. 

Glossary:

Hard Brexit - a clean separation from the European Union, with the UK giving up full access to the European single market and customs union, in exchange for gaining full control over the right to make new trade deals, laws and regulations.

Volatility - the rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.