BLOG: Political risk and political patronage
While the Scottish independence referendum served as a high-profile example of political risk, in our view it was merely a prelude to next year’s UK general election which we believe is likely to represent a far greater source of uncertainty and investor discomfort. The sensitivity of the stockmarket to political interference is only likely to increase as we edge towards the election, especially as the decline of the Liberal Democrats as a viable coalition partner has raised the likelihood of an ineffectual government lacking sufficient majority.
Our macro-thematic approach encompasses social, economic and political developments and the general election is one of the biggest influences currently on our radar. We expect a more populist tenor to political debate as parties compete for critical votes and when looking at the ramifications of the approaching election, it is important to examine both the potential ‘winners’ and ‘losers’. We summarise below the portfolio themes which have been informed by our analysis of domestic politics:
• Avoiding Utilities. Ed Miliband’s promise to freeze energy prices illustrates the extreme political risk attached to power utilities in this country. These risks are brought to life when one considers how many more potential voters are customers rather than shareholders of power utilities. Given such an imbalance, the temptation for politicians to pander to consumers is obvious. With onerous obligations already in place which compel energy companies to purchase growing proportions of power from commercially uncompetitive green sources, we are avoiding the sector. With this in mind, the recent ‘shot across the bows’ of utilities by the Public Accounts Committee regarding who should bear the huge costs of infrastructure development, has in our view raised a storm-warning cone that shareholders would be wise to observe.
• Investing in Asset Managers, Wealth Managers and Pension Providers. The far-reaching changes to the pension market announced earlier this year in Chancellor Osborne’s ‘Saver’s Budget’ have given further cause to own a sector underpinned by compelling, long-term themes. We believe the asset and wealth management sectors will benefit from rising equity markets and from long-term demographic support as the 48-64 year old cohort, a key driver of saving and investment, expands significantly.
• Avoiding Incumbent Banks. We are disenchanted with the outlook for the large incumbent banks whose fortunes we view as being driven by political and regulatory imperatives, rather than free market forces. These incumbents face shrinkage in their share of the retail/SME (Small & Mid-sized Enterprises) market, and lower margins due to increased competition.
• Investing in ‘Challenger’ banks. The political hostility to incumbents is in stark contrast to the encouragement being given to the establishment and expansion of new, smaller, ‘challenger’ banks. In particular, political support is being given to the expansion of lending to employment-creating SMEs.
In addition to analysing the implications of the UK election, some of the larger positions in the fund are informed by an assessment of which industries are operating in a supportive global political climate:
• Global Healthcare – There has been a profound shift in political sentiment towards the pharmaceutical industry, aided by rapidly growing political awareness of the extreme hazards posed to global health by new ‘bugs without drugs’. This has encouraged the industry to return to its core activities of discovering and developing new drugs, and to dispose of low-risk, low-return consumer orientated operations acquired during the past decade.
• Avoiding Tobacco – The tide of opinion in emerging markets – the growth engine that has been the main driver of tobacco companies’ business over the last decade – seems to be turning in favour of anti-tobacco legislation. In developed markets, tobacco companies have seen their volumes come under pressure from government health campaigns, the spread of smoking bans in public places and, most recently, the introduction of a ban on cigarette branding in some markets.