Since the poor showing of the Conservatives in the General Election and the success of Labour, Heartwood Investment Management has been considering the likely consequences for UK assets should there be a shift away from the political ‘centre’ to an administration favouring higher levels of state intervention.
While another election is not yet on the horizon, the unpredictable state of British politics over the last couple of years led Michael Stanes, investment director at Heartwood, to consider such a scenario and its potential impact for portfolios, especially in a case of a less corporate-friendly environment.
Mr Stanes would logically expect funding costs for the UK government to rise in anticipation of greater fiscal spending, gilt yields being likely to back up quite meaningfully. He would, therefore, keep Heartwood’s exposure here very controlled, as it is now, with very short duration.
The firm would be more cautious on the prospects for UK property, particularly the London commercial and residential markets. While it does have some exposure to the commercial market, it reduced this “quite some time ago”.
In equity, most of the exposure to UK indices is via large capitalisation companies listed in the UK but operating principally overseas. To that extent, the 70-80 percent of their aggregate revenues in overseas currencies would immediately boost sterling profits from a translation point of view, thereby providing something of a sterling hedge.
“We would expect more domestically-orientated sectors to be negatively impacted (particularly retail, banking, property shares as mentioned above, and utilities on renationalisation fears) and smaller company names in general to show more volatility.”
Mr Stanes stressed that the question of currency is, perhaps, the most difficult.
“While a run on the pound might be expected in the short term, we do start from a position of sterling having already depreciated considerably. To make a further move out of sterling at this point, we would therefore need to have a relatively high conviction that a Labour administration or agenda is going to come to pass.”
In summary, Heartwood continues to be positioned quite cautiously in UK assets overall, as it has been for two years. This is evidenced by an underweight position in UK equity, a heavy skew to international companies listed in the UK compared to more domestic names, having short duration in UK gilts (and limited exposure to UK gilts in the first place), and the firm’s lowest exposure to UK property for five years.
Heartwood Investment Management provides investment management services for individuals, financial advisers and charities. It has over £3.2 billion of assets under management and administration (as at 30 June 2017).