McQuaker remains bullish despite local and global headwinds

Henderson’s head of equities Bill McQuaker comments on the coalition's ‘shotgun wedding' and why he is still bullish on equities despite the difficult times ahead.

The announcement of the coalition between the Conservatives and the Liberal Democrats was successful in removing immediate political uncertainty following the election, but further out the ‘shotgun wedding' between the two parties raises almost as many questions as it answers.

Whilst one piece of the puzzle may now be in place, it remains to be seen just how this unlikely new partnership will work in practice. None of the three main parties were entirely honest with the electorate about the scale of fiscal retrenchment needed to stabilise the public finances.

The Conservatives had, however, been most vocal about the dangers of failing to make an early start on reducing the deficit.

It was unsurprising therefore that new Chancellor George Osborne has been the busiest minister in the new-look Government: announcing spending proposals to meet the Conservative Party's pre-election promise of £6bn worth of spending cuts this year, to be followed by an emergency Budget on 22 June that will look to set out a more comprehensive - and hopefully credible - long-term deficit reduction programme.

As David Cameron was at pains to point out when he entered Downing Street, there are difficult times ahead. What is clear is that taxes will be increased and spending plans will be scaled back.

Mainstream economists are forecasting slow growth as a result, although there's an alternative school of thought suggesting that the private sector is already well-prepared for such an environment, and may indeed find that growth prospects may prove to be less dire than originally feared.

The emergency Budget will also see concerns shift dramatically from the private sector towards the public sector. Most FTSE companies managed to keep their heads above water during the recession by aggressively cutting costs and paring staffing levels as close to the bone as possible.

Over the past six months, however, companies have grown in confidence that the worst is behind them, and have been looking to expand and hire more people. It looks like it is now the public sector's turn to endure this particularly painful but necessary process.

At the portfolio level, whilst the headwinds are many, we remain bullish on the prospects for equities for the year ahead, as a result of sustained positive earnings growth through the first quarter for corporates and upside surprises across macroeconomic indicators. Economic data continues to reinforce the global economic recovery, with the fundamentals in place for equities to continue to move up.

However, if worries over fiscal instability in Europe were to continue, the ongoing risk sell-off could threaten economic growth going forward.

It is worth remembering that the UK does not function in isolation. Investment markets and sterling will continue to be affected by pressing global concerns, most pointedly the still precarious economic recovery and continued concern about sovereign debt across several eurozone countries.

Bill McQuaker is the head of equities at Henderson.