Although sterling and domestically-focused stocks sold off following the news of a hung parliament on Friday, star fund manager Neil Woodford says there is no need to panic.
In fact, the Citywire A-rated manager, who runs the CF Woodford Equity Income and recently launched Income Focus fund, feels even more optimistic about the UK’s economic outlook following the election result.
Speaking in the wake of Friday’s general election result, which saw the Conservative party fail to gain a majority, Woodford said he disagreed with a lot of the extreme conclusions that had been discussed.
‘From where I’m sitting ... economically not a lot has changed. In fact, in some respects, the outlook for the UK economy has actually improved,’ he said.
With Theresa May having failed to increase her majority and boost her mandate, Woodford said the government was more likely to adopt a looser fiscal policy, Woodford said. This means the government will borrow and spend more.
‘I would also expect, for example, the cap on public sector pay to change, as part of this fiscally-stimulative agenda,’ the fund manager added.
In Woodford’s opinion, looser fiscal policy has the potential to boost economic growth.
If the Conservative party is able to form an alliance with the Democratic Unionist Party (DUP), Woodford suggests that a ‘hard Brexit’ will become less likely. This is also a positive as investors and companies both fear the potential fallout associated with the UK leaving the European Union’s (EU) single market.
‘Membership of the EU Customs Union could be seen as a minimum requirement if a deal is to be struck with the DUP and, in turn therefore, the probability of a softer Brexit outcome has risen,’ said Woodford.
Although Theresa May still plans to kick off negotiations to leave the EU on 19 June, Woodford says it is unlikely that anything important will be decided until after the German elections in September.
‘So there is plenty of time for the UK’s political dust to settle,’ he added.
Sterling and stocks with economic sensitivity, known as ‘cyclicals’, sold off following the election result. Overall, Woodford describes the market’s response as ‘relatively measured’. With this in mind, he says the election outcome requires no major changes to the portfolios he runs.
Steve Davies, the Citywire A-rated manager of the Jupiter UK Growth fund, agreed with those saying the SNP’s reduced support meant a second Scottish independence referendum was less likely. If Scotland remains part of the UK, there is a reduced possibility of a ‘hard Brexit’.
‘Assuming a second general election is required before the year is out, further increases in public spending are likely to figure prominently in that campaign and this may eventually provide a boost to the UK economy,’ Davies added.
Although the outlook for UK consumers looks a little more uncertain following the election, the fund manager does not expect to see a significant increase in inflation from here. This would only happen if sterling collapses, he added.
With this in mind, he believes the investment case for the domestically-focused stocks he holds in the portfolio remains intact. In comparison to global multi-nationals, he says UK cyclicals continue to look cheap.