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UK General Election: A SKAGEN Perspective

The fog is finally beginning to lift over UK politics following the Conservative government's re-election last week with its best general election result since 1987. Boris Johnson's overwhelming 80 seat majority also gives his party a clear mandate to deliver the Brexit withdrawal agreement with the new Parliament set to approve it later this week.   

Short-term clarity

The election result provides welcome clarity for investors that the Conservatives should govern for the next five years and that the UK will at last leave the EU at the end of January. This is also likely to boost business and consumer confidence short-term – retailers were among the best performing UK stocks on Friday – while removing Labour's threat of nationalisation lifted the share prices of utility, energy, telecom and house-building companies. The pound also reacted positively, rising to reach pre-referendum levels, and while sterling's strength will weaken the overseas earnings (and potentially dividends) of the multinationals that dominate the FTSE 100, the more domestically-focused FTSE 250 hit a record high as all sectors posted gains.   

Longer-term uncertainty

Once the short-term euphoria (or relief) has worn off, however, the outlook looks less certain. The UK's withdrawal is only the first step to 'get Brexit done' and Boris Johnson still needs to negotiate a free trade agreement with the EU by the end of 2020. With many of the new Conservative MPs representing traditional Labour-held industrial heartlands, the Prime Minister may seek a softer Brexit to safeguard the UK's manufacturing sectors, particularly as his large victory means he no longer needs to appease the hard-Brexit supporters within his own party. On the other hand, Johnson's huge majority also provides the freedom to push for a harder Brexit if he wishes and his recent conduct in expelling centrist Conservative MPs suggests this should not be ruled out. While a softer Brexit would likely be the preferred route for most companies and their investors, it may well come with prolonged uncertainty (and volatility), particularly if a trade deal can't be agreed before the end of 2020.

Company resilience

At SKAGEN, our company focus means that we have kept a close eye on our London-listed holdings and those with any material UK exposure amid the political uncertainty of the past few years. While all of our equity funds currently hold UK-listed companies[1], most exposure is relatively small. SKAGEN Global has the largest portfolio weighting in UK-listed companies, largely concentrated in non-life insurers Beazley and Hiscox, which are among the fund's largest holdings.

While both companies have faced a challenging claims environment this year, the UK political situation has not altered the team's investment thesis, as Knut Gezelius, Lead Portfolio Manager of SKAGEN Global, explains: "Beazley and Hiscox are resilient, well-managed companies and both remain well-placed to deal with the Brexit transition. They have been in the portfolio for a number of years now, we meet regularly with management and believe the long-term investment cases for both companies are attractive."

Beazley generates only 4% of premium income from the EU but is likely to welcome greater certainty over its operations and for its clients. In the company's 2018 Annual Report[2], CEO Andrew Horton commented that although it had not seen any major negative impact, the ambiguity over Brexit was inevitably on some clients' minds, adding: "The challenge at the moment is uncertainty – hopefully we will know soon where we are and it will be easier to ensure that our plans are fit for purpose." 

Hiscox is also a global insurer but has greater exposure to the UK, which generates over 20% of premiums according to a recent trading statement[3]. The company describes Brexit as "structural not strategic" and although recognising in its 2018 Annual Report[4] that political uncertainty was constraining investment returns, it expected minimal impact on its core underwriting business, with CEO Bronek Masojada commenting: "We have put in place the structures needed to continue to serve [mainland Europe] customers". Hiscox and Beazley each established European offices last year to make underwriting policies from the EU easier and can also use Lloyd’s Brussels subsidiary. Both companies' share prices climbed 1.9% on Friday.

The UK financial services sector generally responded positively to the election result, particularly banking stocks which should benefit from greater stability. If the Conservative's election promise to 'unleash Britain's potential' as part of the UK's decoupling from the EU includes greater regulatory freedom, the benefits could spread further, as Gezelius explains: "If Boris Johnson were to pursue a 'Trumpian' policy line with more benign and less burdensome financial regulation, that would obviously be another incremental positive for Hiscox and Beazley, alongside the benefits of greater political certainty."

Opportunities ahead

Our bottom-up approach means we will continue to monitor the UK political environment and Brexit process as part of our ongoing fundamental analysis to understand the drivers we expect to create shareholder value. Companies and investors prefer certainty over ambiguity and the clarity provided by the convincing election result is positive for UK businesses, at least in the short-term. However, with share prices continuing to rise and break new records, it may be that we also experience elevated market volatility next year, even if Westminster is more stable than 2019. Time will tell, but a key advantage of our stock-picking approach is that our funds will be ready to take advantage of any opportunities that lie ahead.

References

[1] NAV in UK listed companies as at 30 November 2019:  Kon-Tiki: 0.8%, Focus: 1.2%, m² and Vekst: both 2.7%, Insight: 3.7% Global: 15.4%
[2] Source: Beazley FY18 Annual Report
[3] Source: Hiscox Q319 Trading Statement
[4] Source: Hiscox FY18 Annual Report

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Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager's skill, the fund's risk profile and management fees. The return may become negative as a result of negative price developments.