Weekly market recap – Boris bounce

Currency markets are quick to react to Johnson’s victory, as the pound immediately rallies over 3%.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 13th December 2019

I’m sure you’ll all have been looking forward to this: Tinder, the online dating platform, has released its hotly anticipated “The Year in Swipe” in which it reveals the latest trends and talking points in online dating. Here’s your guide to the perfect dating profile (hint: if you’re a vegan who’s into battling the climate crisis, you’ve got a head start!)

After three years of rejection, investors and traders have emphatically been swiping right for the UK equity market which had one of its best days in three years. Asset class returns in sterling and local currency are below; following the results of the UK general election, equity markets rocketed as a layer of uncertainty was lifted.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

We ended last week’s blog with the question could there finally be a catalyst for the UK equity market to advance? Well it turns out the answer was a resounding yes. Before we look at the market impact of the election result, it’s interesting just to visualise the realignment that appears to have taken place across the electoral map.

Chart 1 below is taken from last week which plots the 2017 Conservative voting margin versus the concentration of the leave vote. We pointed out that while the Conservatives had campaigned on a clear “Get Brexit Done” platform to draw votes within the top left quadrant of the chart, the Liberal Democrats had fought with a “Stop Brexit” policy which threatened the Conservatives in the bottom right quadrant. The Conservative’s gamble was therefore that fewer pro-Remain seats would be lost than they could gain pro-Leave. Chart 2 shows just how effective this strategy turned out to be, with the seats changing hands highlighted in solid colour. For every seat lost by the Conservatives to the Liberal Democrats, the Tories went on to pick up nearly 14 from Labour!

Source: EQ Investors, Electoral Commission, Dr Chris Hanretty (UEA)

So what does this all mean? Having now won the largest Conservative majority since the 1987 election, the Prime Minister will be able to implement pledges from his manifesto. First and foremost, this will involve getting Brexit done which we expect to be done by early 2020. But as my colleague pointed out in a blog post last week, the exit in January marks only the start of phase two of the UK-EU divorce talks in which the trading relationship will be negotiated.

Nevertheless, the currency markets were quick to react to Johnson’s majority with the pound immediately rallying over 3% on Thursday night before a slight retracement. The FTSE 100 and FTSE 250 also rose as trading on the London Stock Exchange opened on Friday morning. UK mid-caps (represented as the FTSE 250 in Chart 3), dominated by domestically focused sectors such as house builders, utilities and retailers, all rose sharply in early morning trading as investors reassessed the future prospects of both the UK consumer and the broader economy.

Source: Bloomberg

With the Bank of England due to meet later this week, investors will be keeping a keen eye on any statements emerging that deviate from a previously cautious stance. Despite the more positive short-term outlook for the UK’s withdrawal, the market is not expecting any significant change in the Bank’s policy rate while lingering uncertainty remains. As such, the trajectory of the pound from here is still anyone’s guess.

STAT OF THE WEEK: 83.9% and 59.4% – the highest (1950) and lowest (2001) electoral turnouts for a UK general election in the post-war period.

Data correct as at: 13/12/19

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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