| MRP
|
McAlinden
Research Partners
| THEME TRACKER
|
|
The UK
election's investment implications: Going long homebuilders
Launched: May
5, 2015
Heading
into the UK's fiercely-fought election on Thursday, there are a few
things that nearly everyone agrees on. Analysts agree that the UK is
facing another parliament with no clear majority for any party and so a
new coalition will have to be formed. Economists agree that fiscal
constraints will ease and the central bank will soon begin tightening
rates, although the timing and magnitude will be affected by who wins.
As for the politicians, despite their many disagreements, the one thing
they can all agree on is that the country needs to build more houses and
MRP recommends taking a long position in UK homebuilders. Here's a brief
snapshot of how the election is shaping up and some of the other
investment implications.
The popular opinion polls have had the two main parties neck and neck
for most of the election, but Labour has regained its lead over the
Conservatives heading into the election on Thursday. Surprisingly,
Labour's recent gains appear to have come at the expense of the UK
Independence Party, which has enjoyed a strong surge from the right.
LABOR IS PULLING AHEAD IN POPULAR OPINION
POLLS ...
Source: Daily Telegraph, Highcharts.com, McAlinden Research
But what counts is which party gets the most seats, and here things get more
interesting. In the UK, it's legal to place bets on elections. In contrast
to opinion polls, which ask people which party they support, the online
bookies show which party people think will win. When the election started,
the odds were about 50:50 for either party to get the most seats; today,
excluding third parties and bookies' fees, the Conservatives are way ahead
with nearly 80% odds of being the biggest party in parliament.
... WHILE THE BOOKIES SHOW THE TORIES WAY
AHEAD TO GET THE MOST SEATS ...
Implied odds of online bookies for most seats, excluding third parties and
fees. Source: Oddschecker.com, McAlinden Research
However, having the most seats isn't enough. To get a majority, a government
needs 326 of the 750 seats. After the last election in 2010, the
Conservatives fell short of that threshold and formed a coalition with the
Liberal Democrats, a smaller party in the center. In this election,
according to the academics at ElectionForecast (who have devised a model
similar to and endorsed by Nate Silver in the US), the Conservatives can
expect to win 281 seats – again well short of a majority.
... ALTHOUGH THE MOST SEATS MIGHT NOT BE
ENOUGH FOR THE TORIES TO FORM A GOVERNMENT
Projected seat distribution. Source: ElectionForecast.com, McAlinden
Research
This time around, a repeat of the Conservative/Liberal Democrat coalition
would also fall short at 307 seats. As would a coalition between Labour and
the Scottish National Party with 318 seats. The SNP has already ruled out
joining a coalition with the Conservatives. So, barring an unstable minority
government, the next UK government could be a tripartite coalition comprised
of Labour, the SNP, and the LibDems with a narrow majority of 344 seats.
Labour or the Conservatives could also cobble together a majority that
includes some of the other much smaller parties. The online bookies show the
Conservatives just squeaking by (boosted by "shy Tories" who tell pollsters
one thing and do another at the ballot box) in a coalition with the Liberal
Democrats and MPs from Northern Ireland, so they might get the first crack
at forming a government that would probably be unstable and short-lived.
... SO BIGGER COALITIONS ARE LIKELY
Possible coalition distribution. Source: 538, Electionforecast.com,
McAlinden Research
While the longer-term investment implications will become clearer once the
elections have been held and the new government takes office, a few themes
are taking shape. As today's Daily Intelligence Briefing explores, the
financial services industry remains at risk: if the Conservatives win and
hold a referendum on EU membership, that debate will inevitably bring into
question London's role in global banking; while a Labour victory will come
with an agenda of more regulation of the banking industry. Labour has also
promised a more active role for the government in transportation and
utilities, which would weigh on those industries.
If there is one thing that all the politicians can agree on, it is that the
UK needs more housing. The Labour Party has promised to build 200,000 homes
each year through 2020. So have the Conservatives. The Liberal Democrats go
farther and promise 300,000. There's just one problem: the UK homebuilders
say the most they can handle is closer to 180,000. The combination of a
major public policy push and constrained resources all but guarantees a full
order book for the UK homebuilders for a long time to come, leading MRP to
recommend a long position in a basket of those stocks. As a group, they have
rallied nicely in the last year and the recent pre-election sell-off creates
a timely entry point. We will go into deeper detail on this theme and other
potential investment implications of the UK election as the dust settles.
Last
updated May 5, 2015
MRP's roster of Active
Themes
MRP's latest monitors: Macro, Sector and Country
Joe McAlinden's current Market
Viewpoint
Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners
Follow me on Twitter
Follow MRP on Twitter
The information provided in this presentation (the "Report") is not to be
reproduced or distributed to any other persons. This Report has been
prepared solely for informational purposes and is not an offer to
buy/sell/endorse or a solicitation of an offer to buy/sell/endorse
Interests or any other security or instrument or to participate in any
trading or investment strategy. No representation or warranty (express or
implied) is made or can be given with respect to the sequence, accuracy,
completeness, or timeliness of the information in this Report. Unless
otherwise noted, sources for public data include Bloomberg, Trading
Economics, and FRED (Federal Reserve Bank of St. Louis Economic Data).
McAlinden Research publishes daily, weekly, and other periodic reports on
the economy and the markets. Catalpa Capital Advisors, LLC (CCA) is a
Registered Investment Advisor which manages client accounts. References to
specific securities, asset classes and financial markets discussed herein
by McAlinden Research are for illustrative purposes only and are not
intended and should not be interpreted as recommendations to purchase or
sell such securities. Securities discussed in the Report may or may not be
held in accounts managed by CCA and/or its associated persons, and changes
in those accounts may be made at any time without notice to its
subscribers. Neither McAlinden Research nor CCA is under an obligation to
inform research recipients if any accounts managed by CCA subsequently
purchase or sell securities discussed by McAlinden Research and they do
not anticipate providing such information.
230 Park Avenue | New York, NY 10169 | (212) 231-8701 | Inquiries: nelly@mcalindenresearch.com
