Why political uncertainty is bad for investors

May 12th, 2010 Posted in Uncategorized

Following the result of the recent general election resulting in a hung parliament, returns on UK government bonds (gilts), equities and sterling are all likely to remain highly sensitive to domestic politics for many months to come.If a weak coalition government emerges, or a party (most likely the Conservatives) tries to govern with a minority administration, there is the strong possibility of another election in six months due to the constant difficulty of pushing policies through Parliament. The prospect of another election is likely to weaken the resolve of the governing party (or parties) to announce the sharp cuts in public spending and increases in tax needed to reduce the budget deficit. No party will want to be associated with the harsh measures that are needed, so soon before another vote, and that will put at risk the already weak economic recovery we are seeing.

Any delay in addressing the deficit will stretch the patience of gilt investors and credit rating agencies and ultimately lead to higher yields which in turn will lead to an increase in the real rate of borrowing. It is by no means certain that the UK economy is robust enough to stand a rise in borrowing costs, and as such a delay in addressing the deficit may lead the UK back into recession.

Politicians must therefore create a government over the coming days that looks likely to be in power long enough to implement unpopular policies. Meanwhile, Greece’s fiscal crisis, and the risk of contagion to other indebted eurozone and non-eurozone countries (including the US), highlights the danger facing the UK if there are delays to fiscal retrenchment.

Implications for Jones Sheridan investors

We repositioned our model portfolios at the start of this month with a view to ensure we took account of the current political horizons. We have already moved out of index linked bonds and shifted some of the portfolio into both UK and International property with a view to stabilising the longer term returns as markets remain volatile.

Equities remain an appealing option although with Sterling weakening against the dollar a more global focus is important. Our portfolios are all positioned with global themes in mind across a range of asset classes. The absolute return funds are also designed to operate in difficult markets and they have the ability to make money out of areas such as currency fluctuations which should prove beneficial over the coming months.

If the government that emerges takes definitive action the prospect for future growth is good although the ride will be a bumpy one. We maintain our view that having a balanced portfolio is key to long term investment growth and the Jones Sheridan Model Portfolios are designed specifically for this purpose. We will of course continue to monitor the situation and make changes if required.

We appreciate you may have specific concerns and if you wish to discuss these please do not hesitate to contact your adviser.