Archives for April 2015

General Election 2015 – the story so far

Officially the UK general election campaign is about halfway done, unofficially of course it is ion the final stages of a marathon that kicked off with the 2014 March budget and its new pension freedoms. There are some signs that the electorate have “hit the wall” with regard to tolerance for political points-scoring.

For the last twelve months the poll ratings for both Conservatives and Labour have remained roughly equal at 30-35% apiece. UKIP consistently poll in third place but their support appears to have peaked at the European elections last May and since then have drifted back from the high teens to the low teens, the Lib Dems and the Greens split a further 15%. The most important change barely registers in the national opinion polls but the SNP has seen a strong surge in support throughout Scotland following the defeat of the referendum vote on independence.

In terms of parliamentary seats, the peculiarities of the constituency-based, ”first-past-the-post” system are making their mark. According to the SNP with about 4% of the overall UK vote will win 47 seats whilst the Lib Dems with about 7% of the vote look set for 24 seats, while UKIP with about 14% will win only 1 seat, and the Greens who generally poll above the Lib Dems will hold onto their 1 seat. The Conservatives look set to win more seats than Labour (283 to 271) with a similar share of the votes, due to Labour’s losses to the SNP..

This looks likely to leave the country in a position where not only will no single party win enough seats for a majority, but quite conceivably the only coalition outcomes that would secure a majority will be Conservative / Labour or Conservative / SNP. Neither of these seem remotely likely to occur. The most likely outcome now is in fact not a coalition, but a minority government supported by other parties on an issue-by-issue basis.

The parliamentary arithmetic will be keenly balanced between those smaller parties willing to support a Conservative minority government in a vote of confidence, and those willing to support a Labour minority government. Miliband may well be likely to win fewer seats than the Conservatives but be more able to win a vote of confidence within parliament.

For some time now the Conservatives have been expecting to pull ahead of Labour in the polls as the economic recovery has taken hold, but this has failed to occur. There is a belief in Conservative circles that the last few days of the campaign will see a surge in support for them, when voters finally decide who to vote for. Indeed polls show that a large number of investors have not yet definitively decided how to vote. It seems though that the image of the Conservatives as the “nasty party” as Theresa May famously remarked, has not disappeared from many voters’ minds, despite good economic news.

As in the 2010 campaign, no party is prepared to give details of precisely where the future austerity which their economic policies require will actually hit – it seems they fear the truth on this is too painful for the electorate to bear.

More remarkable is the recent narrowing of policy differences between the two major parties. Having trumpeted the positive effects of sticking to their “long term economic plan” for so long, in the campaign Cameron has been very quick to make new campaign pledges for more money for the NHS, subsidies for commuter rail fares and reductions in Inheritance Tax. None of these previously appeared in the long term plan or appear to have been funded by savings elsewhere. Similarly Labour, having criticised the policies of austerity over the last five years, has placed bearing down on the deficit at the heart of its manifesto, and has resolutely refused to embrace any unfunded campaign pledges in order to demonstrate its fiscal responsibility. Both parties are seeking to win over the centre ground of voters – the Conservatives by showing by spending more and Labour by spending less!

Perhaps the most important statistic in this campaign is that more than 60% of the electorate (and an even higher proportion of those who will actually vote) are over 55 years old. For most of these voters it is pensions, be they provided by the state or by private provision, which are their critical focus. This is now probably a more important issue than jobs for this age group and is perhaps a factor in why the rising number of jobs is not feeding through into Conservative voters.

With two weeks to go, this election remains too close to call. The UK financial markets have been happy to ignore the political uncertainty to date – a minority government of any sort may be seen as a negative development by the currency and gilt markets on the basis that it will be difficult for the government to implement its policies. On the other hand a weaker sterling is usually good news for UK stocks and politicians who are unable to do anything could be seen as good news in that they are unable to mess anything up!

Homogenised bulls

Using peer pressure to create a stockmarket rally

Currency-adjusted, Japan is the best-performing major stock market so far this year. This has continued the uptrend that began in late October of last year, a move that started with the announcement of an increase in QE from the Bank of Japan. This is the second phase of the Japanese equity bull market that was kick-started by Abe’s election victory and the introduction of Abenomics in late 2012.

That first phase saw shares rally as the currency fell sharply, government spending was boosted and an aggressive QE policy from the central bank. For the most part it was driven by foreign investors who were quick to understand the reflationary impact of these policies and their impact on corporate earnings. Japanese domestic investors were not major buyers during this phase of the market. Then from May 2013 to November 2014, the market consolidated the very substantial gains made in the prior six months.

Over those eighteen months, a number of key, interlinked, institutional changes were, however, implemented in Japan as part of Abe’s “third arrow” of structural reforms. Two of these have been crucial for the stock market and both rely heavily on the Asian concept of “face” and the strong Japanese desire not to be seen as out of line with the rest of society.

The first change has been to assert control of the Government Pension Insurance Fund (the GPIF). By insisting that it take notice of the Bank of Japan’s new inflation target of 2% and the effects of the QE programme aimed at generating that inflation and by replacing the previous chairman, the government has forced the GPIF to reconsider its strategic asset allocation, which was heavily biased to Japanese Government Bonds with negligible yields, towards much higher weightings of Japanese shares and international securities. As the leading pension fund in the country, the actions of the GPIF are carefully monitored by the other pension and investment funds in Japan and then copied, as is typical in the Japanese culture.

The second change has been the introduction of a new stockmarket index, the JPX Nikkei 400, which the GPIF is using as its benchmark for the domestic Japanese equity mandates that it is awarding as part of its move towards greater equity exposure. Membership of this index is not solely determined by market capitalisation, but also by companies’ success in implementing good standards of corporate governance together with operating profitability and, most crucially, corporate return on equity – which for shareholders is possibly the critical measure of profitability. For companies that would normally expect to be included in any list of the top 400 Japanese companies, the discovery that they do not qualify for this index has become a mark of shame.

After decades of keeping shareholder interests a long way down the pecking order of corporate priorities, the introduction of this index, and its use by the leading investor in the country, has finally produced a change in corporate mindset. For example, Amada, a leading Japanese toolmaker, was mortified to find itself excluded from the index last summer. It has recently announced that for the next two years it will pay out half of its net profits as dividends, use the other half to buy back shares and hire two independent non-executive directors by the middle of next year.

The result of these changes is a dramatic re-allocation towards equities by Japanese institutional investors – this is most likely to be seen in the new financial year which has just begun (April 1). For the first time in a generation Japanese investors are likely to become significant net buyers of Japanese shares. Simultaneously, Japanese companies finally have a good reason to be far more shareholder friendly, to make profits, to declare them as such and to reward their shareholders with dividends from those profits. This is the path trodden by many US companies over the last five years and has been very rewarding for shareholders there. It may finally be time for shareholders in Japan to enjoy the same experience.