UK equities
13 Dec 2019 | By Richard Buxton

UK plc: open for business

After three and a half years of uncertainty, today’s clear electoral result means that the UK is once again investable.

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Few people relished the prospect of the first December UK general election since 1923, but for all the rough and tumble of the campaign, from an investor’s perspective today’s clear majority for the Conservative Party is a welcome result.

Writing before the full result is known, what has become clear is that the size of the anticipated Tory majority means that Prime Minister Boris Johnson will no longer be beholden to the more extreme Eurosceptic elements in his party.

The initial result may well be accompanied by frequent restatements of Johnson’s oft-repeated commitment to “get Brexit done.” In practice though, the sheer scale of his working majority will mean that the Prime Minister should, ultimately, be in a position to allow the transitional timetable for the UK’s departure from the EU to slip over the course of 2020, greatly reducing the risk of a “cliff-edge” departure from the EU in a little over 12 months from now.

This, in its own right, is a significant development, given a widespread acceptance among informed commentators that the likelihood of settling trade negotiations in a period of less than a year is extremely small.

I expect to see business confidence respond positively to this new set of political realities, which in turn should be genuinely positive for the UK economy.

The next Budget, which is expected to be announced in February, is likely to be loose in terms of fiscal spending, and therefore stimulatory in economic terms.

I expect consumer confidence – remarkably resilient in recent years notwithstanding all the uncertainty – to strengthen significantly.

Turning our attention to sterling, it is probably fair to say that the initial reaction of the pound to the result has been initially a little more muted than might have been expected. That being said, the pound’s breaching of 1.20 versus the euro feels significant, and I would not be surprised to see sterling strengthen further from here. Similarly, at the time of writing, the pound was trading at around 1.35 versus the US dollar; from here, it wouldn’t seem too outlandish to suggest that 1.40 could soon be within reach.

Sterling’s new-found resilience should help suppress UK inflation, and therefore boost real-terms wage growth over the year ahead, further bolstering consumers.

It is no secret that the UK stock market is likely to see this result as a resounding positive. While a strengthening sterling is likely to weigh somewhat on the big dollar earners like the oil companies, instinct tells me that the effect of sterling strength will be outweighed by the sheer relief that a prolonged period of political stasis is, at last, over.

It is perhaps worth pointing out that Johnson’s clear mandate potentially has broader implications for British politics than may at first appear the case. In some respects, the Conservative Party has fundamentally changed, and its manifesto commitment to significantly increase public spending is the greatest sign that the UK is no longer facing another five years of “more of the same.”

Labour, almost inevitably, will argue that today’s result does not represent a rejection of Corbynism, and that it primarily reflects extreme public fatigue with Brexit. Political theorists may debate this point for years to come, but it nevertheless seems clear that Corbyn’s brand of “Big Government” has been rejected by the electorate.

In light of this, it seems highly probable that Labour will enter a period of introspection, before rediscovering a more centrist flavour of politics.

The disappearance of the perceived risk of a Corbyn-led government will be seen as an overwhelming positive by international investors, for whom the UK market may now regain its previous appeal.

As an investor in a sector that has endured many consecutive months of net outflows, today’s result feels like a distinctly positive development.

 

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