Politics in recent years have thrown up all sorts of surprises –and the latest UK election is no different. Whilst a Conservative majority was likely, very few anticipated the scale of the victory. Markets have reacted strongly to the result –with UK focused assets rising sharply, on the back of an “economic relief rally”. With a disorderly Brexit, and the tail risks associated with a Labour government now removed, we expect the undervalued, domestically focused assets to perform well. In this short note, we break down the initial market reaction and our expectations into 2020.
Unsurprisingly, Sterling and domestically (UK) focused stocks have rallied strongly on the back of the election result –notably Homebuilders, Real Estate, Banks and Utilities. The FTSE 250 (which is more exposed to the UK economy than the FTSE 100is) rose 5% by 9.00am London time. Sterling jumped to a 19-month high on the back of the exit polls being released but didn’t move higher thereafter. The current “ceiling” is largely due to the fact thatBrexit itself is still an unknown quantity –in terms of the real economic impact to the UK.In numbers, Sterling is now trading close to 1.34 against the US Dollar and 1.20 against the Euro.
For UK investors, the result is a relief –not due to any political preference but more so because a large overhang of uncertainty has been lifted. Sterling investors, like many businesses, have been paralysed by binary outcomes that mean decision making can only be based on chance and probability, rather than thought and rigour. Investment portfolios have needed to remain balanced to the outcome. Now, we move to a position of being able to allocate capital with more conviction –both domestically and overseas.
Whilst this election result appears positive for UK focused assets for the next few years, there are still risks lurking beneath. Brexit is still far from complete and the impact on the UK is still largely unknown. Furthermore, gains from the SNP also reignite the argument for a breakup of the union.
We would expect UK domestic assets to outperform international equivalents in 2020, due to valuation differentials making UK focused assets more favourable. We also expect significant fiscal spending to be announced in the next budget, which will provide a further boost to the economy.
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