Election Year is Forcing Fund Managers to Change Tack

Political
Stalemate
in
France  

President
Emmanuel
Macron’s
gamble
of
a
snap
election
has
left
France
in
a
political
purgatory.
The
first
round
of
voting
on
June
30
resulted
in
far-right
leader
Marine
Le
Pen’s
Rassemblement
National
(RN)
party
winning
33%
of
the
popular
vote.

Second-round
run-off
voting
on
Sunday
last
week
placed
Le
Pen’s
party
in
third,
after
Macron’s
centrists
successfully
co-ordinated
with
leftist
parties
under
Nouveau
Front
Populaire
to
suppress
Le
Pen’s
ascent
to
power.

The
result
has
left
France
in
limbo
with
no
party
winning
an
outright
majority
in
the
557-seat
National
Assembly.

A
new
prime
minister
is
yet
to
be
appointed.

Michael
Field,
European
market
strategist
at
Morningstar,
says
a
left-wing
majority
would
not
normally
be
beneficial for
the
markets.
And
yet
this
time
it’s
different.

“The
Nouveau
Front
Populaire
manifesto
outlines
its
wish
to
increase
the
minimum
wage
materially,
as
well
as
freeze
energy
and
basic
food
prices,”
he
wrote
in
a
note.

“The
manifesto
proposes
all
these
measures
be
funded
by
the
re-introduction
of
a
wealth
tax
and
an
increase
in
income
tax
for
high
earners.
Given
the
inherent
fears
investors
had
around
a
right-wing
government,
this
announcement
will
very
likely
be
a
welcome
one.”

French
Stocks
Under
Pressure

While
there
are
concerns
about
the
impact
of
such
policies
on
the
utility
sector,
there
is
far
more
scepticism
about
whether
a
left-wing
alliance
would
even
be
able
to
implement
its
programme
in
the
first
place.
And
Field
notes
that
some
French
stocks
are
now
undervalued
after
June
and
July’s
shocks:
these
include
Gucci
owner
Kering
(KER),
BNP
Paribas
(BNP),
Société
Générale
(GLE),
AXA AXA,
Engie
(ENGI),
Veolia
(VIE),
Edenred
(EDEN)
and
Vinci
(DG).

Thomas
Becket,
co-chief
investment
officer
at
Canaccord
Genuity
Wealth
Management,
is
staying
clear
of
European
equities
altogether.

“Quite
simply
the
European
growth
trajectory
and
the
political
backdrop
put
together
is
rather
stagnant,”
he
says.

Instead,
he
argues,
investors
seeking
opportunities
in
European
equities
should
look
for
growth
companies
exposed
to
global
growth
trends,
such
as
the
luxury
goods
sector,
rather
than
stocks
that
are
dependent
on
Europe’s
domestic
economies.

European
Fixed
Income
More
Attractive

That
said,
he
doesn’t
rule
out
increasing
exposure
to
European
fixed
income.

“Yields
in
Europe
are
lower
than
in
other
parts
of
the
world
but
as
a
GBP
investor
when
you
hedge
the
currency
back
to
sterling,
because
European
interest
rates
are
lower
than
UK
rates,
you
do
get
a
pickup
in
yield,”
he
says.

“I
would
also
argue
some
elements
of
European
corporate
credit
remain
quite
attractive.”

French
bond
markets
sold
off
after
the
surprise
election
result
which
saw
legislative
victory
for
the
left
despite
their
lack
of
absolute
majority.
The
French
stock
market
fell
after
the
snap
election
was
called,
but
has
managed
a
minor
rally
after
a
far-right
majority
was
ruled
out.

The
rising
popularity
of
far-right
parties
is
not
just
a
French
phenomenon.
Last
month
the
European
Union
held
elections
that
handed
far-right
parties
their
best
wins
in
years,
with
major
gains
in
Germany
and
Italy
making
the
headlines.

Indeed,
the
growing
popularity
of
far-right
movements
in
Europe
shows
a
broader
shift
to
a
more
protectionist
and
populist
world
view,
which
some
fear
could
hit
the
European
Union
more
than
other
global
players.

Nonetheless,
Fernando
Romero,
portfolio
manager
at
Madrid-based
Abaco
Capital,
is
sceptical
of
the
long-term
impact
this
will
actually
have
on
the
eurozone
economy.

“European
elections
generate
a
little
bit
of
noise
in
the
markets
in
the
short
term,
just
like
they
have
in
France,”
he
says.

“But
all
in
all,
the
European
Union’s
institutions,
and
the
fact
we
all
share
the
euro
as
our
currency,
limits
the
changes
that
the
newly
elected
candidates
can
make.”

Labour
Landslide
and
Housing
Stocks

In
the
UK

the
Labour
Party
under
Keir
Starmer
won
a
clear
majority.

Though
Romero
is
doubtful
sceptical
Starmer’s
Labour
government
will
produce
radical
changes
for
Britain,
Abaco
Capital
is
itself
buying
UK
stocks
in
the
housing
and
construction sectors,
suspecting
that
these
stocks
will
boom
under
Labour.
The
companies’
shares
have
already
rallied
this
year
in
expectation
of
a
Labour
victory.

New
chancellor
Rachel
Reeves
has
used
her
first
week
in
the
Treasury
to
announce
a
wholesale
reform
of
the
UK
planning
system,
with
compulsory
housebuilding
targets
and
green-belt
building
projects
back
on
the
table.
Could
this
prompt
a
UK
housing
stocks
rally?

Morningstar’s
Field

said
in
a
video
this
week
that
Labour’s
homebuilding
target
is
very
ambitious,
but
is
tied
closely
with
pledges
made
to
voters
and
first-time
buyers
on
the
campaign
trail.

“It’s
a
level
we
haven’t
seen
in
the
UK
since
the
1970s
in
terms
of
homebuilding.
And
who
is
going
to
be
at
the
forefront
to
benefit
from
that?
It’s
obviously
the
UK
homebuilders,
the
big,
listed
guys
like
Persimmon,
which
is
our
top
pick
in
the
sector.”

Michael
Browne,
chief
investment
officer
of
Martin
Currie,
welcomes
the
housing
reform
in
particular,
and,
like
Romero,
has
allocated
significant
sums
to
UK
housing
stocks
as
a
result.

“For
me
it
feels
like
a
double
headed
coin,”
he
says.

“We
have
been
through
a
decent
growth
trajectory,
and
actually
in
Europe,
the
UK
is
the
only
country
with
positive
PMIs
for
construction,
manufacturing,
and
services.

“We
want
to
build
more,
rates
are
falling,
affordability
is
increasing
because
overall
by
the
end
of
this
year,
most
people
will
recoup
the
real
wage
losses
they
suffered
in
2023.
So,
you
ought
to
own
the
housebuilders
and
the
associated
chain
[downstream].”

That
said,
Browne
believes
that
obstacles
to
planning
reform
may
persist
due
to
the
length
of
time
it
takes
to
get
projects
off
the
ground.
The
chart
below
suggests
investors
are
sceptical
that
housebuilders
can
meet
these
targets.
He
is
also
keeping
an
eye
on
renewables,
after
Ed
Miliband,
the
new
energy
secretary,
lifted
the
ban
on
onshore
wind
farms
in
the
UK.

For
Hiroki
Hashimoto,
senior
fund
manager
of
Royal
London’s
global
multi-asset
portfolio
range,
Labour’s
win
did
not
prompt
a
change
in
asset
allocation
within
his
funds.
He
does
not
rule
one
out
in
future,
however.

“There
are
two
things
we
will
be
watching
out
for:
the
impact
of
investor
sentiment
and
how
that
gets
priced
into
the
market,
and
the
key
impact
of
inflation
and
growth
on
the
UK
business
cycle.”

He’s
also
cautious
about
the
sterling
exposure
in
each
of
the
multi-asset
funds
he
runs.

“If
you
are
in
the
defensive
fund
you
need
to
have
more
sterling
exposure
for
UK
investors
than
global
or
foreign
currencies,”
he
says.

“If
you
do
get
more
positive
sentiment
in
the
UK
because
of
stability.
that
impacts
sterling
positively,
but
that’s
a
negative
for
some
investors
in
a
way
because
it
depresses
the
value
of
foreign
assets.

“In
our
case
we
go
for
sort
of
a
currency
hedge,
with
higher-yielding
fixed
income
assets
alongside
commercial
property
to
offset
the
fact
global
equities
could
be
challenged
if
we
get
a
more
positive
outcome
for
the
UK.”

America
Elects:
Biden
vs
Trump?

But
the
big
electoral
event
is
in
the
US.
With
former
president
Donald
Trump
leading
incumbent
Joe
Biden
in
the
polls
after
Biden’s
disastrously-incoherent
TV
debate
performance,
investors
are
preparing
for
a
second
Trump
term.

“My
first
view
has
been
that
Trump
will
win
the
election,”
Becket
says.

“My
second
view
is
that
his
administration
will
be
much
more
pragmatic
than
people
perhaps
think.
The
last
time
round
there
were
elements
of
chaos
and
uncertainty.
But
both
[Trump
and
Biden]
have
had
extremely
questionable
policies,
both
of
which
have
just
pointed
towards
the
ruination
of
the
US
government’s
balance
sheet
and
long
term
chaos
because
of
the
huge
amount
of
debt
that
they
have
created
for
not
a
huge
amount
of
return.”

As
such,
Becket
believes
the
environment
for
US
Treasuries
could
become
more
volatile
under
Trump –
whereas
under
Biden
the
US
Treasury
market
may
be
calmer
because
it
would
represent
the
status
quo.
That
said,
a
Biden
re-election
could
be
less
positive
for
US
equities,
which
have
hit
record
highs
this
year,
than
a
second
Trump
presidency.

“If
the
Republicans
control
both
the
Senate
and
the
House
of
Representatives
and
Trump
is
in
power,
then
you
have
got
a
situation
with
potentially
much
greater
tail
risks
than
if
there
were
more
checks
and
constraints
on
the
power
of
the
President,”
he
says.

“Our
asset
allocation
views
are
being
driven
by
economic
growth
being
solid
but
unspectacular,
and
a
global
recession
being
avoided,
as
well
as
inflation
continuing
to
decrease.

“All
the
while,
we
know
politics
and
geopolitics
will
keep
throwing
short-term
surprises
for
us
to
try
and
sail
through
– just
as
they
have
throughout
this
turbulent
decade.” 

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