Commenting on the election result and what it means for pension funds, John Walbaum, Head of Investment Consultancy at Hymans Robertson said: “The only thing we can be certain of is more uncertainty. Uncertainty over Brexit and uncertainty over the future policies of the next UK Government.
“Equity markets are reacting fairly calmly. The main impact, as you would expect, is on the Pound, which is down around 2% against the Dollar and Euro. If that continues, while it will have a short term inflation impact on the UK, the underlying position won’t be affected that much. Real inflationary pressures remain low and will continue to stay low until we see meaningful increases to wages.
“The big question now is what will happen to Brexit and how Brexit negotiations will proceed. Arguably last night’s results have increased the chances of a softer Brexit and, depending on the make-up of the government that emerges, possibly even a second referendum on the issue. We hope for a sensible rather than hard Brexit.”
Discussing what it could mean for pension and social care policies, he added: “Pensioners will no doubt be hoping that this could lessen the chances of the Triple Lock being removed. The Government’s own figures show that the State Pension changes introduced in April 2016 have reduced the long-term costs of the State Pension by £8bn a year including the cost of the Triple Lock. Moving to a “Double Lock” will be the equivalent of a £250 a year reduction in State Pension and will have the most significant impact on low and middle-earners who rely on it most.
“We hope the new Government takes a sensible approach to the regulation of Defined Benefit (DB) pensions. The aftershocks from BHS are still being felt across the DB universe. You cannot argue with the rhetoric of protecting pensions from unscrupulous bosses. However the reality is that this reckless behaviour is in the very small minority. Developing law to deliver the Conservative’s manifesto promise would have been fiendishly difficult.
“There is also an urgent need for the new Government to solve the current crisis in social care. Tackling the issue of ever-increasing costs from an ageing population can only be achieved through cohesive policy-making. The solution has to be integrated social, savings and healthcare policies that recognise the effects of demographic change. We’re sitting on a time bomb. To protect future generations, sorting this out is a must. The Conservative Party proposed a Green Paper on social care and we hope that any new Government will work towards achieving this.”
Steven Cameron, Pensions Director at Aegon said: “In the immediate aftermath of the hung Parliament, we can expect to see trade-offs as parties seek to command a workable majority. With Brexit negotiations due to commence in days, the emphasis has to be committing even greater time and resource to arrive at an effective negotiating stance.
“While reforms of state pensions and social care funding featured heavily in the campaigning, they are now unlikely to be short term priorities. The Conservatives’ proposals on both issues are at odds with those of other parties, making them particularly challenging to push changes through Parliament.
“Ironically, the political uncertainty we face could actually create short term stability on pension and savings policy.
“In the meantime, investors should continue to take a long term view and avoid any knee jerk reactions. It’s worth speaking to an adviser before making any hasty decisions.”
Richard Colwell, Head of UK Equities Columbia Threadneedle Investments:Trying to rise above the gloom, clearly the result of the UK election is not what the market expected. But it’s worth remembering that the initial market reaction post the EU referendum and US election proved short-lived. A number of stocks that could be vulnerable under a more interventionist government have been weak for some time (eg transport and utilities), so this isn’t coming from a clear blue sky. Any sell-off in media and leisure stocks could prompt takeovers. However, if pressure on Sterling continues and the currency returns to the lower end of its recent trading range, dollar earnings for multi-nationals listed in the UK will be boosted. Remember the UK stock market is much less reliant on the domestic economy than in previous cycles.
In addition, the UK market has been out of favour with international investors for some time. Asset allocation to UK equities is already as low as it was in 2008 at the height of the banking crisis, so there is no sense of hot money leaving the market. The valuation gap with other equity markets, notably the US but also Europe, is as pronounced as it’s been for a decade on several metrics.
So lots of uncertainties and the domestic political and economic path forward is murky. However for UK equities the outlook is more measured and we will be looking for selective buying opportunities.
Michael Metcalfe, global head of macro strategy at State Street Global Markets; and Bill Street, head of investment for EMEA at State Street Global Advisors, offer their views.
Metcalfe commented, “Markets were poorly prepared for this surprise result in UK. While the dramatic narrowing in polls prior to the vote had introduced an element of doubt, an outright Conservative victory was still the base case scenario for most.
“The only thing we can be certain of now is that political uncertainty will rise significantly, as will the required premium for UK assets. Party lines and divisions are very different from the hung parliament of 2010, making it far harder to form workable coalitions. The chances of a minority government or even a repeat election within the coming year are far greater. The government has fallen at its first election hurdle. The approach to the potentially larger and more dangerous hurdle of Brexit will now surely be delayed. It is a shock that markets were not well prepared for, and in response sterling is likely to remain under pressure.”
Street commented, “While sterling weakened in the final weeks of the election campaign, markets still expected a Conservative majority, therefore this initial sterling weakness is no surprise and is likely to continue as international investors demand a higher risk premium. Sterling is already substantially undervalued against the dollar and euro, reflecting future uncertainties. Such under-valuations do tend to correct over long time horizons and it is possible the election result will lead to a softer Brexit.
However, any move higher is likely to be delayed until there is greater certainty.
“The initial risk-off market reaction will drive gilt yields sharply lower. Over the short term, we believe that this move will continue as political uncertainty reigns supreme. However, the emergence of a Labour-led coalition could trigger a bearish environment for gilt yields. As the market prices in campaign promises of fiscal stimulus and a softer-Brexit, we believe that gilt yields could be on course for a sustained upward move over the medium term.”
|
