MW Who will be the winner in Rishi Sunak's snap U.K. election?
By Brett Arends
The British prime minister calling a shock general election for July should be excellent news for U.S. investors
News that United Kingdom Prime Minister Rishi Sunak has called a shock general election for July should be excellent news for Pariah Capital - and for U.S. investors.
British stocks make up one of the eight assets in this column's 2024 Pariah Capital investment portfolio, and I'm betting that an election is just what the doctor ordered. British assets have been in the doldrums since the Brexit referendum in 2016, and a change of government is long overdue.
Read more: Take that, Wall Street! Pariah Capital wins again - and the picks for 2024
Pariah owns the exchange-traded funds Franklin FTSE United Kingdom FLGB and iShares MSCI United Kingdom Small Cap EWUS. More on them in a moment.
All the polls say Sunak's Conservative Party is heading for an epic defeat, and that rival Labour Party, headed by Sir Keir Starmer, will form the next government. Starmer has spent years burnishing his credentials as a moderate and has every reason to try to be friendly to business.
Sunak's decision to go to the polls on July 4, a full six months before he absolutely has to, looks like madness to many Conservatives in the U.K.
Elections can be good for stocks in several ways, even if they replace a supposedly right-wing Conservative government with one from the supposedly left-wing Labour Party. The current government is weak and out of ideas. The Conservatives have been in power for 14 years, and even conservatives in the country are fed up with them. The mood here has been depressed. Everyone is ready for a change.
A new government is likely to have more energy, fresh ideas, and much stronger leadership.
Labour's leadership has been keen to distance itself from the more radical, anti-business wing. In a controversial move recently, leader Sir Keir Stamer even praised late Conservative Prime Minister Margaret Thatcher for trying to "drag Britain out of its stupor by setting loose our natural entrepreneurialism."
Britain, unlike America, has a parliamentary system of government. That means, in effect, that the British prime minister combines the U.S. roles of president, speaker of the House of Representatives, and majority leader in the Senate. They command enormous power - but only so long as their party has a clear majority in the House of Commons, and they have the confidence of their members of parliament, known as MPs.
Keir Starmer is hoping to repeat the success of his Labour predecessor, Tony Blair, who in 1997 won the biggest landslide in modern British history. (The FTSE 100 index U.K.: UKX of the country's biggest stocks rose 20% in the five months following the election, although this probably had more to do with the broader moves in global markets than domestic affairs.)
Crucially, if Starmer becomes prime minister, he will have a freer hand politically than Sunak to pursue closer trading relations with the European Union, which Britain finally left in 2020. Starmer opposed Brexit originally, and his party is not saddled with the troubled history on the subject of Sunak's Conservatives. Starmer has publicly ruled out rejoining the European Customs Union or single market during the next parliament, which will be scheduled to last five years. But he will have plenty of opportunities to improve trading relations.
What does this mean for us in the U.S.? It's pretty simple. Even though Britain is a small, damp island - I am sitting in London right now looking out of the window at a gray, rainwashed skyline - for various geographical and historical reasons it has a stock market that is far more important and interesting than you'd expect. The London Stock Exchange is more international than it is British. Even the smaller companies get much of their revenues from outside the U.K. And the big names are dominated by well-known multinationals such as oil giant Shell $(SHEL)$ (U.K.: SHEL), consumer goods behemoth Unilever (U.K.: ULVR), and pharmaceuticals companies AstraZeneca (U.K.: AZN) and GSK (UK:GSK) $(GSK)$.
Yet because of the Brexit hangover and the political chaos of the last few years, the entire index has been under a cloud - figurative rather than literal. Global investors have steered clear.
Prices have risen far less than in other markets. That has left the shares comparatively cheaper.
SG Securities' chief number cruncher, Andrew Lapthorne, estimates the London market overall trades on just the forecast per-share earnings of the next 12 months. The figure for U.S. stocks: 21 times. London seems cheaper in relation to earnings even than emerging markets, SG estimates.
FactSet data argue that the FTSE 100 index of larger stocks has a dividend yield of just under 4%, and the FTSE 250 of smaller stocks just over 4%. (The dividend yield on the S&P 500 SPX is about one-third as much, although in the U.S. the picture is complicated by stock buybacks as well as dividends.)
But the real jewel in the crown of the London stock market is that it's so hated. Global fund managers just don't want to know about it. Participants in the monthly global fund manager survey "have been consistently underweight U.K. equities since Jul '21," reports BofA Securities. It is the only region in the survey that fund managers are currently shunning. They report being overinvested in U.S. stocks, continental European stocks, Japanese stocks, and emerging-market stocks.
This, naturally, is why Pariah Capital is a fan of U.K. equities.
This year's Pariah Capital is betting on eight assets. For the U.K. bet, I suggested splitting the money evenly between FLGB, which is dominated by the large stocks, and EWUS, which has higher fees but invests in the middling and smaller stuff.
I shouldn't have to add, but will: Pariah Capital is a tongue-in-cheek exercise and investors should remember that all these investments involve risk.
I hadn't expected to do an update on Pariah until June, but so far the portfolio is beating the traditional benchmark, a so-called "balanced" or 60/40 portfolio, by a clear margin. (It is, however, trailing the S&P 500.)
The balanced portfolio consists of 60% U.S. stocks and 40% U.S. bonds, which is what you'd get from, for example, the Vanguard Balanced Index Fund VBAIX.
So far this year your 60/40 fund has earned you 6.2%. Pariah Capital? Oh, 9%.
-Brett Arends
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May 25, 2024 10:26 ET (14:26 GMT)
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