Iguana Insights: 2024 UK Election

We wanted to offer a few comments on the now upcoming UK general election given the investment relevance to the Fund.

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We now have a general election date set for the UK – July 4th, around 6 weeks’ time from now. With the Fund presently significantly long the UK stock market, a common client question is that they can see the value we see in UK equities but are unsure on a “catalyst” for value unlock. With the election in place, we argue there is now a catalyst process in place for the UK market to realise its value over time. A catalyst?process?is not the same as a catalyst?event, indeed it is much more satisfying in our experience because it tends to run for a long period of time:

Whatever one’s political persuasion, the key point is: six weeks from now, the UK will be one of the few developed countries with a stable political environment over the next five years. Think about that: no elections, no worries about populism, no uncertainty, nothing. What a lovely investment environment that we can – at long last – offer international investors! In pretty much all areas of the developed world at present with the possible exception of Scandinavia, that is in no way a given. Now, in the UK, investors, corporates and individuals can all plan for at least five years. Lack of planning clarity is likely a big contributor to the UK’s current discount versus comparable developed stock markets.

A second positive is that the uncertainty timescale to the election is now very compressed. We had previously feared an election would not happen until the end of the year, a long time in stock market terms. However, now we only have six weeks of “uncertainty” and this relatively short period of time is well within the stock market’s ability look through.

Thirdly, crucially one doesn’t need to really take a view on the politics of either party – both parties have essentially the same economic policies. Defence? Both have committed to raising spending. Homebuilding? Both want to build masses of homes. Economic growth? Both say they want it. Stability in financial markets? Check. Supporting “ordinary people”? You had better believe it. This unusual position is likely a surprise to international investors reading this - and answering the question “Why? they are basically very similar!!” now requires a longer discussion about party politics – but the point is that both parties have ended up clustering around the centre in all the crucial economic policies. In the UK, it is generally in the second or third terms of government that the real philosophy of the various parties come out, in the first term we believe the focus will be on avoiding controversy, building competence and creating room for any major policy changes in the future. And again, that will be a great place for a G7 nation to be over the next five years given the macropolitical backdrop in which we are now living.

For these three reasons – clarity, rapidity, commonality – we think that UK equities will likely quickly be able to look forward and discount a future recovery in relatively short order. Thus, we have a catalyst process: a quick election, significant political stability, policies aimed at economic growth and recovery … and five years to see how it goes.

In terms of the Fund, as discussed in recent newsletters, we became more positive on UK equities early last year and have progressively built up a long position in the region, with some sector-wide hedging in place. We believe we are in a solid place to capture some of the value in the UK as indeed we have been doing since the start of this year. We see two areas of opportunity. First, we have identified a number of global companies based in the UK that are trading at a clear 30-50% valuation discount to global peers that are listed elsewhere. These are typically companies with more cyclical end markets – as in the UK, defensive companies are often at a premium to their global peers. All these companies require is stability in the investment and political/governance environment and their earnings growth should do the rest. Second, we also see a number of UK local companies that have strong local market positions but have been suffering from relatively weak consumer demand (the UK has essentially been in a recession for most of 2023 and for a real earnings recession for longer than that). These companies, which are primarily so-called mid-cap companies, should benefit from a recovering local growth environment.

While there are risks to the general outlook, we think that investors will look back on July 2024 as something of a turning point in the UK stock market and that stability, certainty and consensus will be progressively repriced over the coming 18 months. As a fund focused on identifying transformation catalyst processes, we will continue to work hard to capture these opportunities, while at the same time carefully managing risk with opportunity.

Feel free to get in touch with any further detailed questions,

For any more information or to comment on newsletters, investment views or performance please don’t hesitate to drop us a line at?[email protected]

Intra-month Fund performance is available to view on Bloomberg via the following ticker: ILSEFBG ID Equity

#UK #election #equities #longshort #iguana Chris Reid Fahd Ahmed Thameema Hamza Wilton Fry