General Insurance Article - Further industry comments on the June 2017 General Election

Further industry comment on the snap General Election called for June 8 from Aegon, Schroders and Hermes Investment

 Commenting on the announcement of a snap General Election, Steven Cameron, Pensions Director at Aegon said: “While Brexit related matters will clearly dominate June’s General Election, Political Party Manifestos could reopen other contentious issues including pensions, savings, taxation and the changing nature of employment. This could include the future of the state pension triple lock, which had looked safe until 2020, the shelved increases in self-employed National Insurance and the unfortunate ‘will they, wont they’ debate on pensions tax relief reform. Whilst revisiting these policy areas may not be a vote-winner amongst pensioners, higher rate tax payers, or the self-employed, the opportunity exists for all parties to set out their stall on these key issues, creating much needed longer term stability.

 “We may also see a new set of economic concerns rising in voters’ minds. For example, pensioners on fixed incomes are particularly affected by the ongoing uptick in inflation we’ve seen since the decision to leave the EU. Some older voters may start asking questions about each of the parties’ plans to ensure it doesn’t surge much beyond current levels.”

 Schroders Chief Economist, Keith Wade, and Fund Manager, UK Equities, David Docherty, comment:

 Keith Wade, Chief Economist, Schroders: “If Theresa May can increase the Conservatives’ majority that would give her more power and room for manoeuvre when it comes to negotiating the UK’s terms of exit from the EU.

 “With the Brexit negotiations expected to finish in March 2019, it would take away the pressure of a General Election in 2020 coming up. It would also give May a little bit more breathing space and less need to strike a final deal with the EU.
 “We did see after the Budget that there was a small rebellion of Conservative MPs which was enough to cause the government to do a U-turn on its tax proposals for the self-employed and I think May has realised this could happen several times during the negotiations.

 “In many ways it would mean that we have probably got more chance of a softer Brexit. The worry before was that the Conservatives would get very frustrated at the lack of progress made during the process and would push for a complete break and a move to the World Trade Organisation (WTO) option.

 “A successful election would give May the mandate to pursue her own Brexit strategy. My sense is that a stronger mandate and more time would allow a more patient approach and a softer Brexit, probably more in line with May's instincts."
 David Docherty, Fund Manager, UK Equities, Schroders: “Recent elections have shown that anything can happen at the ballot box with market and media analysts wrong-footed by the Brexit vote in 2016 and by the unexpected success enjoyed by anti-establishment candidates and parties around the world. Given this backdrop, definitive predictions are therefore hazardous.

 “Nonetheless, it is fair to assume that the announcement of a UK General Election to be held on 8 June will lead to some increased uncertainty for the UK economy as consumers and corporates try to identify the implications of the visions articulated by the competing parties. This uncertainty will be compounded by the fact that May is explicitly seeking a mandate to push Brexit through Parliament.

 “In many ways it could well take the shape of a re-run of the referendum, but this time overlaid by party politics.

 Throughout the campaign, we will therefore be carefully watching surveys of corporate investment intentions and consumer confidence to measure any economic effects and their bearing on the performance of UK equities.

 “Whatever the outcome, uncertainty will continue after the votes are counted. On Brexit, for example, were May to achieve a strengthened mandate, as the odds currently suggest, it would still be unclear whether this would lead to the EU agreeing to our demands in such a way as a WTO fall back outcome could be avoided.

 “On her other policy platforms, markets would also have to weigh up the extent to which she might be a more economically interventionist premier than her Conservative predecessors. There will also be implications for the Union depending on how the Scottish National Party performs at the ballot box.

 “In short, the election and its aftermath will bring new uncertainties for investors. Our task, as always, will be to look for mispriced stocks possessing the inflection points for a revaluation and material outperformance. If the market behaviour around recent political events provides any guide, the coming weeks and months should throw up many such opportunities.”

 Neil Williams, Chief Economist at Hermes Investment Management, reacts to the call for a UK General Election on 8 June. The PM’s call today to bring forward the election to 8 June looks both a way of consolidating her political position and tacit recognition that completing onerous Brexit negotiations will take longer than the two years hoped for by triggering Article 50. Holding the election this June instead of by May 2020 effectively offers her an extra two years to strike a deal before having to go to the nation again.

 But even this may not be enough, with the biggest Brexit question still about the length of the journey ahead. I fear our negotiations could take many years to potentially end up back close to square one in terms of striking Mrs May’s preferred “bold and ambitious free trade agreement”. This suggests she will negotiate to maintain access to - but no longer full membership of - a tariff-free system (akin to Canada’s deal), and/or a customs union (similar to Turkey’s). 

 Buckling up for a long journey...

 Even this will need time. First, the deal when struck will need Parliamentary approval, and then be subject to a ‘phasing in’ period (Mr Hammond has suggested two years) to allow firms, consumers and officials to adjust to the new arrangements. A second independence referendum in pro-EU Scotland, though not precluding Brexit, would also have provided an extra hurdle to completing it before the previous election deadline of May 2020.

 Second, the UK is relying on a cooperative sign-off by its 27 EU peers. The only real precedent we have is Greenland’s exit in 1985. This was a ‘soft’ exit, but it took three years. We, larger and 44 years entwined in the EU, will need longer. 

 We’re opening the ‘trapdoor’ in a highly-charged political year. Voters facing national elections in Germany, France, and probably Italy may want to approach it as protest to six years of euro-zone austerity. In the ‘peripheral’ economies, reform fatigue and populist parties are building. Incumbents may thus be reluctant to condone an easy UK exit that puts its economy ahead of their own. 

 Third, EU law forbids trade-deal ‘bigamy’, in terms of enacting agreements elsewhere while still an EU member. This prevents a quick compensating tie-up with the US for example. So, a challenge is to remain close to the European negotiating table to maintain the best trade and regulatory deals for services, which account for 80% of the UK’s gross value added. This makes it more ambitious than a Canada-style deal. 

 After the election, we’ll still have to compromise if we want tariff-free trade - after all, this is our second European ‘divorce’, after the ERM in 1992. So, any tie-ups in the future - with Europe or elsewhere - will doubtless come ‘with strings’. 

 A bit like EU membership then!

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