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OPINION

The cost of Conservatism

The cost of Conservatism
October 7, 2016
The cost of Conservatism

The attractions of the FTSE 100 are still, it seems, the result of its dollar-earning strength, such that a weak sterling means more paper profits in the reporting currency. The larger multi-national corporations represented on the blue-chip index are also in demand as so-called bond proxies – income-producing replacements for evaporating bond yields, an obvious consequence of central bank policies. This week we’ve looked at some of these shares in our tea- up with SharePad, and whether it’s worth paying such a high price for their relative sanctuary from economic fluctuations – if indeed their so-called economic moats, also discussed in the cover feature on page 20, offer sanctuary at all.

The reasons for the FTSE 250’s ascendancy are currently less clear – sure it has more than its fair share of overseas earners, but weaker sterling is likely to put a squeeze on the profits of its many constituents that rely on the sale of imported goods, as will the immediate economic damage that the actual process of severing ties with the EU will inflict, as the new chancellor Philip Hammond warned. But Mr Hammond’s speech also provides a solution: if Brexit brings pain, it seems the government is prepared to spend its way out of it, a sensible approach given it can borrow more cheaply than ever before. Beneficiaries will include housebuilding, likely to be the beneficiary of billions in government incentives to plug the housing shortfall, and infrastructure, with major projects like a new Heathrow runway set to follow new nuclear power out of what Hollywood producers might call ‘development hell’.

Perhaps most interestingly of all to investors has been the fleshing out of Mrs May’s earlier suggestion that the government would not be afraid to introduce policies that bring about a more equitable balance between business elites and those they employ. It is a surprisingly interventionist approach for a party that can be more usually characterised by its free market philosophies, and one that investors will increasingly need to consider as Theresa May’s premiership unfolds. Because if she means what she says - and the general impression is that she does – then someone will need to bear the cost, maybe overpaid directors but quite possibly shareholders, too. It will certainly pay to understand your exposure to such political risks as well as the opportunities.