The Conservatives, under Boris Johnson have won a landslide victory. His election win should provide some much-needed clarity for financial markets.
Initial market reactions see sterling up around 2.5% and almost all segments of the UK equity market pointing upwards. Large companies are up 1.5%, middle sized companies are up around 4.5%, small companies are up around 2% and significantly, domestic facing stocks up around 7.5%, whilst UK government bonds are steady.
The end of the Brexit gridlock is good news for UK assets. We expect the Withdrawal Agreement Bill, which had already been agreed by parliament, to be passed in short-order and for the UK to enter into the transition period. During the transition, all rules remain unchanged, business will continue as normal and thankfully we’ll avoid queues to and from Dover.
Trade deal negotiations
Negotiations will now move onto the next phase which is hashing out the nature of the UK’s future relationship with the EU. The terms of the withdrawal agreement negotiated by PM Johnson position us for a looser relationship than those agreed by his predecessor and currently enjoyed by the UK. But, given the scale of the majority won by the Conservatives, there is scope for the future relationship to take a variety of forms. We think this puts a short term limit on the upside potential for UK assets, despite breaking parliamentary deadlock. Future direction will become clearer as the terms of the future relationship become better known.
Many experts believe this new phase can last just as long (or longer) than the Brexit process has taken so far and cite the case of Canada’s negotiation of a trade agreement with the EU taking seven years. We think the UK is far better positioned to negotiate a speedier trade deal for a couple of reasons. The first is that we are already fully aligned with the EU so we could just ‘copy & paste’ in the worst case scenario. Secondly, given the magnitude of trade between the UK and Europe already underway, it is in both sides’ interest to maintain as much of this as possible. This is vastly different to negotiating with a new trade partner to grow new trade – classic loss aversion.
The UK has until 30 June to submit an extension request to the transition period beyond December 2020. After this time, the prospect of a hard Brexit would be back on the table. This is another reason we think upside to UK assets will be limited in the short term.
With the UK exiting by the end of January, we’ll also see a fiscal stimulus package in the February budget. This should be good news for consumers and companies now have some certainty on the future direction of travel.
There are also strong signals from the US that they have reached agreement on the first phase of a trade deal with China and that President Trump has agreed it. There is no legal text to be signed as yet. So there may yet be some twists and turns in this story, but it looks like another significant obstacle to corporate and consumer confidence is receding. This is good news for growth assets.
The impact on your portfolios
Your portfolios are up, benefiting from the broad positive risk sentiment in the market. The balance across UK assets that we implemented several quarters ago means we are capturing some of the bounce in domestic stocks as well.
The biggest headwind is the strength of sterling that would impede foreign assets in particular, but as mentioned, we think scope for further sterling strength is limited in the short term.
Contact our team
Have a question about investing with EQ? Please email firstname.lastname@example.org, we’re always happy to hear from you.