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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
 

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Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners

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