Prime Minister Boris Johnson’s party gained votes and seats across England and Wales, and will enter 2020, after almost a decade of being in power, with a parliamentary majority of 80.
The election was being closely watched by investors, and not just because of the way it could shape the UK’s exit from the European Union. Fundamental questions surrounding the role of the government in the economy were debated during the campaign, with potentially wide-reaching implications.
A relief rally
Global investors warmed to the election of a majority Conservative government, with sterling appreciating sharply as the election result became clear. The value of £1 rose to as high as US$1.35.
The positive reaction was reflected in the UK stockmarket’s gains too. While the FTSE 100 index of the largest UK-listed company shares rose 1.1% on 13 December, the day after the vote, the more domestic-focused FTSE 250 index of mid-sized companies rose by 3.5%.
Tristan Hanson, a fund manager in M&G’s Multi Asset team, says the strong rally in UK-focused shares reflects the “much more business-friendly outcome compared to the possible alternative of a Corbyn-led government”.
Michael Stiasny, a fund manager in M&G’s Equities team, agrees that the stockmarket rally was to be expected. “The lifting of the immediate threat of nationalisation and the Labour party policy that all companies would have to transfer 10% of their shares to employee ownership will also see domestic and international investors revalue the UK market and the currency.” Indeed, shares in sectors seen as most vulnerable to Labour policies, not least utility stocks, soared on the removal of this political risk.
Stiasny also expects that anticipation of greater public spending, including investment in infrastructure, as well as potential tax cuts under the Conservatives, may also support UK share prices.
“Combined with looser fiscal policy, the UK economy may enjoy a period of much better growth than experienced in recent years,” adds Hanson.
What about Brexit?
The UK is, of course, due to leave the European Union – with an agreement – in January 2020. There are competing views, however, on how Boris Johnson’s large majority will shape the course of negotiations with the EU, and ultimately the economic impact of Brexit.
“To what extent does the majority allow him the latitude to seek an extension to the transition period if that is what is needed to get a trade deal signed?” asks Stiasny. “This would remove one of the last remaining risks that there could be a no-deal rupture at the end of 2020.”
Hanson is among those who are more confident. “While there may be uncertainty about the timing and extent of the ultimate trade deal with Europe, Boris Johnson will be less beholden to the hard-Brexit European Research Group faction of the Conservative party.”
Others believe the government’s large majority could empower the prime minister to take a harder line with Brussels.
Ben Lord, a fund manager in M&G’s Fixed Income team, says we are entering “a period of uncertainty around trade negotiations, with Prime Minister Boris Johnson perhaps more likely to see his large majority as a mandate to take a more aggressive stance.”
Lord believes this could have adverse implications. “Until we have more clarity around trading arrangements beyond 2020, it is hard to see companies increasing investment for a while yet. This would be bad for the UK economy and for growth.”
Keeping the election in perspective
The market volatility that accompanies elections are a healthy reminder of why it can be prudent to not rely entirely on any single market, even the UK, for your financial future.
By ensuring your investments are allocated in a diversified way, across different types of assets across a range of countries and regions, you can avoid being hostage to domestic politics and any changes in the value of sterling. After all, the fate of the global economy will not be determined by the outcome of this election in the same way that the UK economy might be.
While it cannot guarantee against losses, diversifying your portfolio effectively – holding the right blend of assets to navigate the volatility of markets – will probably help you achieve your long-term financial goals.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.