13 December 2019
Following the unexpectedly strong election victory for Boris Johnson and the Conservative Party, some of our portfolio managers offer their views on how this is likely to impact markets.
The thumping Conservative general election win, which has resulted in a vastly reduced Labour opposition party, has exposed just what this election was about: an electorate that was fed up with what turned out to be ineffective tactical voting and which resoundingly voted for a Brexit resolution. The campaign slogan of “get Brexit done” clearly appealed. Our estimates were for a 40-50 Tory majority, so this much extended majority (projected to be 76) and its best since Margaret Thatcher in 1987, has had the predictable market impact. Sterling is rampaging higher by 2% and while it is unlikely to be as good for FTSE 100 large caps it should be good for mid and small caps. Similarly, it could be negative for any unhedged non-sterling exposure on portfolios in the short term as currency translation effects hit. The question going forward is can sterling hold onto its gains of the last few months? This all depends on phase 2 of the Brexit bus-ride, the trade negotiation discussions and how close or far from the European Union, PM Boris Johnson feels he can drive. Short-term strength in sterling is obvious with this political gridlock unlocked, but medium-term strength into next year may not be so obvious.
The UK election result is very / extremely positive for European equities and within that stocks exposed to the UK economy and European cyclicals (autos, construction, building materials).
European equities and UK equities have seen very substantial outflows over the last 18 months – indeed European equities have seen more outflows as a percentage of the starting base than any other asset class in any other region. This has been down to a pervasive fear of politics and uncertainty driven by Brexit (first) and more recently by the threat of Labour winning the UK election on a hard-left, anti-business platform. These twin fears have discouraged asset allocators everywhere from investing across Europe (including the UK) with allocations low to both asset classes and both asset classes feeling almost friendless at times. Businesses have also been reluctant to invest in the UK and UK economic growth has been lower than it would otherwise have been; this has had knock-on effects into European business confidence too and economic growth over the past year or so, in addition to China / USA trade concerns.
We now expect business confidence in the UK to bounce back with knock-on effects into Europe. This will be good for economic growth and the earnings of more cyclical companies. Given the size of the electoral majority PM Johnson will have strong latitude to strike his own negotiating position with respect to the European Union (EU) without being held hostage to Northern Ireland politicians (DUP) or the more strident Brexit supporting members in his own party. The EU for its part will welcome a far more coherent and cohesive counterpart in the negotiations.
We expect risk assets across Europe to be well bid and inflows to resume pushing up European equity markets further with a bias towards more cyclical stocks and plenty of domestic UK exposure. It is important not to underestimate how low allocations are to many UK / European risk assets so these impacts may well be large and persist for some time.
Our experience over the last few years of elections, including the referendum, has shown that elections affect currency markets first, then equity markets and credit markets least of all.
We expect that a Conservative government should have a relatively benign effect on credit markets. In particular, the credits we focus on have been performing well, as demonstrated by the latest reporting season as well as the latest Bank of England (BoE) stress tests. The BoE has subjected UK banks to extremely severe stress testing (scenarios far worse than the Global Financial Crisis) and all passed – which in our view demonstrates that UK banks can overcome a shock far worse than, for example, a hard Brexit. Insurance companies are similarly solid. Moreover, we are reassured by the resilience of the credit market after previous UK general elections and after the Brexit Referendum.
The UK election has returned a solid majority for the Conservative party. We believe this is a positive outcome for key areas of the UK equity market, such as more domestically orientated companies. The utility sector was also exposed to the potential Labour policy of nationalisation – this risk is now off the table. Similarly, banks were exposed to increased bank levy under Labour proposals, so this risk is also off the table for now.
A majority in Parliament now enables progress on policies like Brexit and we expect to see a positive impact on consumer sentiment at this important festive time of year.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.