Readers who are misfortunate enough to follow me on the Tweet Generator, will have probably seen my concerns over the General Election due in early May and how I am pretty much downing tools at the moment and not buying anything. I see this as the most uncertain Election in my Lifetime (yes, that long !!) and Stockmarkets tend to detest uncertainty.
I suppose a Golden Rule of blogging is to avoid Politics - I am sure I will regret writing this as any bias I have will no doubt creep out and upset 50% of my Readers - I will try to be objective !!
As they say, “never work with Animals or Children” - I am not sure what this has to do with anything, but it is probably superb Blogging advice.
I have been doing an almost Daily Summary of the Indexes from a Technical Viewpoint at the Top of my Homepage - and I have been getting more Bearish every day.
My current Strategy is to have a huge Short Position on the FTSE100 (I am up to about 40% Short against my Long Exposures, via Spreadbets and XUKS) and I am looking to Sell stuff to reduce my Exposure and to build Cash. Cash has the benefit of giving an element of Hedging (ok, this is strictly not true but it does cushion any drops) and will also enable me to snap up Bargains once the dust settles - although this could be much later in the year. My current thinking is that there are a handful of Stocks which I would like to top up on if they get cheap enough - this might be before the Election but I don’t expect to go too crazy with any such buying.
My Strategy is not just based on the General Election. We usually get a Sell off at this time of the year (“sell in May and go away and don’t come back until St Ledger day….”) and the problems around Greece are far from resolved - it is my view that these will not be resolved until Greece leaves the Euro. I have no idea when this will be, and it could be years away - although I do feel that things are building to an inescapable conclusion and it will certainly cause problems for the Markets this summer.
In addition, Markets have had a very good run up at the start of this year (2015) and to me it is unsustainable without a healthy Correction to take out some ‘heat’. Markets NEVER go up in a straight line.
I have also been looking at SocGen Infinite Turbos as a way of Shorting - you may have read the Blog. I am tempted to do a tiny Hedge using this tool - just to see how well it works in practice. I am waiting on TDDirect to tell me if they can execute the trade for me !!
My action will very much be driven by the Technicals of the Indexes. It is almost as simple as Sell the FTSE100 at RSI 70 and Buy the FTSE100 at RSI 30 (Relative Strength Index). My approach is very much to ignore the ‘Noise’ and stuff like scary Bloomberg and CNBC and to just trade according to what I ‘see’ on the Technicals.
“Trade what you see, not what you feel……..”
What are the sources of Election Uncertainty?
In simple terms, I see 2 areas of uncertainty that could worry the Markets:
What are the possible Outcomes?
There are several likely scenarios that could happen - but all of them will most likely be bad for Stocks in the run up to the Election:
There is an alternative to Coalition which I think is usually called a ‘Confidence & Supply’ agreement. This is where a smaller Party will back the Government on certain issues but not on others - sort of on a Bill by Bill basis. I am not sure if this would be good or bad. It might give the smaller Party more leverage and Power - not good. If a Small Party signs up to a Coalition (like the Liberals did) then they are sort of firing all their Arrows at once and will lack ongoing leverage to get their will - it is clear that the Liberals have suffered from this.
With an ad hoc Confidence & Supply agreement, the Small Party will be able to say to Labour or the Conservatives - “I’ll back you on x issue, if you let me have y issue…”
The Liberals have suffered so much from being in the Coalition that I doubt any other Small Party will be daft enough to repeat this calamitous error. The other downside of a Confidence & Supply agreement is that we will effectively have a very weak government - and a huge risk of a ‘No Confidence’ vote and a further General Election before the 5 year Fixed Term Parliament is up.
The LibDems situation is insightful - despite them being the party of ‘Proportional Representation’ (where essentially MP’s Seats are allocated based on the percentage of Votes Polled nationally), it is very likely that even with a tiny 8% or so of the Poll, they could end up still being the 3rd or 4th largest party. It seems to be the case that the MPs in Constituencies that they already hold are pretty hard to dislodge. It is obvious that they are going to lose a lot of Seats, but they may still have enough to prop up the Conservatives again - and whatever their Voters say, they will not want to give up those Ministerial Cars !! Markets would like this as it would just pretty much continue things as they are.
Remember (and this is a General Point), Markets hate Uncertainty. As soon as something is resolved, then Markets can factor it in and move on. That is why seemingly Bad News often causes Stocks to jump up - the Market likes the resolution of problems.
This is a hot topic at the moment and I thought I would chuck some thoughts in. I find Cameron's behaviour over the TV debates quite strange - I wonder if he is being put up to it by Lynton Crosby (I think that's the name of the Australian Guru they flew in). The logic appears to be that if they do the TV debate, then Cameron "has everything to lose" and little to gain. To me this just does not stack up - firstly, Miliband is pretty easy to beat I would think and secondly, it strikes me that Cameron hardly has a great Lead to protect !!
Labour and the Conservatives seem to have been Neck and Neck for ages and with the way the Electoral Maths works (due to the relative numbers of Voters in Constituencies), Labour only need something like 35% to get a Majority whereas the Cons need 39% for a Majority. So it strikes me that Cameron needs to do something to 'move the dial' and get a clear lead. Cowering from TV debates does not seem to be the right move !!
Cluck, Cluck, Cluck………
Labour and the SNP
One of the most interesting aspects of the Election is how the Labour vote seems to be crumbling in Scotland - this could lose Labour many Seats and might stop them getting a Majority. Amazing really.
Strangely, although I would hate the thought of Miliband in No.10, it might not be quite so scary to the Markets - this could be because for all the talk of spending Money, they will probably not Borrow much more than the Conservatives (Austerity Lite) - and the extra stimulus to the Economy might not be a disaster - although it might set up disaster in a few years !!
However, the problem here is that the SNP is very much an ‘Anti Austerity’ Party - such an idea mystifies me - it is obvious that either these Politicians have ZERO understanding of maths or that they are blatant Liars who will say anything to the Electorate to get into power. Both are possible reasons and both are very depressing. They rely on the fact that the ‘Man or Woman in the Street’ has no understanding of Debt and Deficits and no time to think about such things anyway. It’s sort of funny because the stupid Conservatives have shot themselves in the foot by sort of claiming to have got the Deficit under control - the Chap or Chapess in the Street now thinks we have no debt !!
As much as Labour’s profligacy upsets me, at least they are nearly half sensible about it - these Anti Austerity Parties are plainly daft - don’t get me started on the Greens !!
When these Young Political Robots study their PPEs at University, do they totally fail to understand the ‘E’ bit?
The Issues with any form of Labour Government will really come about from their ‘Anti Business’ stance - I explore this further in the Sector bit below.
The UK’s relationship with the EU
Another worry after the Election would arise if UKIP are involved in a Coalition with the Conservatives or if we get the unlikely Conservative Majority - this would be the possibility of an EU Referendum. Personally I would love to get out of the EU but I think the Markets would not like this beforehand and it could cause huge ructions for a period if we do vote to leave. I understand that such an ‘In / Out’ Vote would take place a couple of years after the General Election - unless of course, UKIP force the issue forwards as the price for their support of the Conservatives. However, UKIP will most likely struggle to get even 10 Seats - so they will not be a powerful force despite them riding high in the Polls, and may play no part in any future Government - either as part of a Coalition or in a Confidence & Supply Agreement.
Historical Trends in Markets around Elections
According to page 8 of the 2015 UK Stockmarket Almanac (available in all Good Bookshops and Wheelie’s Book Emporium at www.wheeliedealer2.weebly.com), the FTSE100 tends to rise prior to the Election and then fall away afterwards. This is corroborated by some research that was going around on Twitter recently. I guess to some extent we have had the rise already, although maybe if the Conservatives start to pull ahead significantly in the Polls, then the Markets could pick up in advance.
This latter point is interesting because there is starting to be ‘talk’ that the Conservatives are beginning to eke out a small lead over Labour and that it might be the start of a trend. The most notable commentator to say this was Peter Kellner of YouGov. However, it could easily dissipate as clearly only a recent development and only a slight advantage.
Which Sectors might be in particular trouble just before and after the Election?
On individual Stocks, I think anything linked to Electricity / Gas stuff could be in trouble - i.e. Centrica (CAN), SSE etc. I think National Grid (NG.) may be the best one to hold and I am actually considering buying some for my Income Portfolio very soon. Even stuff like Telecom Plus (TEP) seems to be suffering - but it could be an opportunity rather than a problem.
Labour might be quite anti Gambling - stuff like 888, TTR, WMH, LAD, NPT, etc etc. The current Coalition has had a go at Gamblers already so they might well leave them alone now. Ironically, it appears that yet more poorly thought through Legislation is having the unforeseen consequence of driving out Competitors (NEVER a good thing for the Consumer) and actually helping Companies like 32Red (TTR) which I hold.
Labour are also making noises about renationalizing Railways - the latter is certainly a policy of the SNP. Failing this, it could be that any Railway Franchises that come up for Renewal get taken over by the State as Directly Operated Railways. I suspect it may also be the case that even the slightest indiscretion by a Private Operator and the Labour Government (or Coalition) will be looking for excuses to move a particular Franchise Operation to DORs. If the Greens or the SNP have any foothold in Government, you can bet quite heavily that this will happen. If the markets start to think the Conservatives will win the Election, then Railway Stocks could benefit early.
Outsourcing Companies like Serco (SRP), Capita (CPI), G4S, MITIE (MTO) might be hurt with all the anti-Privatisation rhetoric, particularly around the NHS - because of course, the State does such a marvellous job of running anything (East Staffs Hospitals, Home Office in general, Police cover-ups, Child Abuse at the BBC, etc. etc.)
Banks could continue to face pressures - I hold HSBA and STAN and they are a bit of a pain at the moment. I would not be keen on other banks, although the new 'Challenger Banks' might be attractive - e.g. Secure Trust Bank, Virgin Bank, and that very recent IPO Aldermore.
Anything linked to 'Sub Prime Lending' like Provident (PFG), S&U (SUS), etc. may struggle with Labour in power. Of course, in the one area that really needs Regulation, Crowdfunding, Social Lending, etc., nothing will be done until people lose a lot of money and cause a stink……
I suppose Fags could come under more pressure from regulation - Plain Packaging is the latest wheeze (excuse the pun !!). Note to Politicians - if you really think Cigarettes are so evil, then Ban them outright. Yep, none of you have the guts…..
Comparison Websites could come under pressure. There has already been a bit of this from the current useless bunch, and a future Government is likely to continue this assault. This could be problematic for stocks like Money Supermarket (MONY) and maybe Esure (ESUR) who have recently bought ‘Go Compare’ (I hold ESUR).
I wonder if Sugar linked stuff will come under pressure - Politicians are always on about taxing Sugar.......this might be a problem for AG Barr (BAG) or maybe Tate & Lyle (TATE) and Associated British Foods (ABF).
Housing is an interesting one - my recent Blog on topslicing Crest Nicholson (CRST) explains it in detail - but whoever gets in, we need a lot of Homes to be built - so I think Housebuilders can do ok longer term. However, in the Short Term, I have now sold all my CRST - they tend to do well in Q1 and then languish for most of the Year anyway. However, a Labour victory will probably mean Housebuilders will be forced to build on land they hold - Miliband has regularly accused them of “Landbanking” and sitting on Land which has Planning Permission - I suspect this is partly true, but more a Political Game as usual. The rhetoric is “use it or lose it” and may mean plenty of negative headlines for Housebuilders. Any suppliers to Housebuilders, may get hit also.
A Labour win will be bad news for Private Landlords. Already Labour Boroughs in London are bringing in ‘Licences’ and the National Labour Party is talking of Rent Controls. This will mean less people will want to be Landlords but the upside for Equity Investors is that certain Companies who are Retail Landlords may get a boost. I understand there are many Businesses interested in this area - particularly Life Insurance Companies who are looking for regular and growing Income Streams because Bond Yields are so low. Why anyone bothers with being a Private Landlord is beyond me…..
Defence Suppliers could face difficulties, whoever wins the Election. The current Government is coming under a lot of flak (geddit?) over its reluctance to commit to the NATO minimum Spend of 2% of GDP - this would no doubt be the case with Labour in power also. If the SNP win, then there has to be a risk that the replacement for the Trident Nuclear Subs gets cancelled or, at least, scaled back. This could hit the likes of BAE Systems (BA.) and Babcock (BAB) among others. Obviously if the SNP get their way and break-up the UK, then the Subs must be at risk.
A weak Pound would be good for US Assets held by UK citizens - so my US Unit Trusts might do well !!
There are probably a lot more Sectors that could be impacted - if you have any thoughts, please make a Comment below as it will help all of us to share such stuff. Thank you.
Time for a WheelieWhinge or two - it really annoys me how stupid governments year after year introduce more Regulation into particular Industries and drive out Small Players and reduce Competition. We see it everywhere - to a large extent, my recent buy of Pets at Home (PETS) plays into this theme as small Pet Shops are forced out of business by overburdens of unnecessary regulation. Cambria Automobiles (CAMB) is another example - it is just too much grief running a Small Garage these days. Pathetic. The EU is a major part of the problem as well. The really sad thing is that Large Businesses shed employment, whereas Small Businesses create jobs - arghhhhh. The biggest irony here is that the Left’s anit-business, pro-regulation bias actually makes things worse for the Consumer - despite all their faux protestations that they are “on the side of the little guy”. Yeah, right.
And while I am flowing, there is another thing……..It really irks me how the latest crop of woefully hopeless Politicians pander to the Electorate and will say and do anything to get Elected. Doing what is right for the Country is the last thing any of them (of whatever colour) believe in. In fact, I am not sure they believe in anything - are they capable of such thought? Sometimes the Electorate are basically a bunch of kids, and we need to be told off and put straight. We cannot have everything provided by a huge and growing State Sector and at the same time pay no Tax and bash our Businesses mercilessly. Instead, they follow the latest whim of the Public (in the form of minority Pressure Groups, Twitter Campaigns and the Media) and make Law on the hoof. We need Conviction Politicians who can actually take a Lead and do what is right - and explain clearly to the Electorate why they are doing it. Instead we just get Law after Law that is counter productive and driven by the desire to get Votes - the State is too big and we need Less Law, not More…….
The Future for the Markets
Markets in general around the World seem to be in a solid Bull Market and I don't see them being derailed as Low Interest Rates and all this QE are forcing down yields on all Assets - so Equities are still the most attractive game in town. From my experience, it seems that we do not get Bear Markets unless there is a Recession - that has certainly been the case for the last 20 years - I guess it is not set in stone, but sort of makes sense.
There is however, a possible future Danger that some stocks get Overheated - US Tech and Biotech is starting to look stretched - some valuations are bonkers - just like in the Dotcom Boom.....
I am currently 40% Hedged against my Long Positions and I have about 10% Cash as well. So I feel quite prepared for any pullback. I am doing very little Trading at the moment and if anything, I will be Selling a bit more. I might do the odd bit of selective buying.
I hope that gives you a good view of my thoughts - feel free to query anything.
Have a great Evening, what’s left of it…..and full apologies to anyone I have offended !!
PS, none of this was written by Wheelie - his Laptop has been stolen and this was written by an imposter…………Sue them, not Wheelie.
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