After all the to-ing and fro-ing on the campaign trail, we know now that the Conservative Party has secured a clear majority in the UK general election after all.
Large numbers of undecided voters meant this was one of the most uncertain elections in living memory. However, the Conservatives’ pledge to end the deadlock over Brexit with their slogan to ‘get Brexit done’ put them in a strong position, ultimately securing the party a comfortable majority.
In this Insight, we explore how the result impacts financial markets, and investors.
Clarity on Brexit, for now
With a workable majority, the government should be able to push its version of the Brexit deal through the legislative process with little of the resistance faced by Theresa May in the last parliament. This could see Britain withdraw from the EU as early as 31st January under Boris Johnson’s revised deal.
The potential for a smooth Brexit removes some of the downside risk for the UK economy. This should be positive for both business and consumer confidence, at least in the short term, with a gradual acceleration in GDP growth and confidence. Households are likely to increase spending and businesses that are primarily exposed to the UK’s economy will receive a boost; most notably retailers, house builders, and some banks.
However, a lot can change over the coming months as the finer detail of the UK’s future trade relationship with the EU is negotiated. This is still, after all, just the beginning of the exit process. Even with the passing of the withdrawal agreement, the UK could still leave the EU without a deal at the end of 2020 if trade negotiations don’t proceed successfully. It remains to be seen whether the UK will have tariff-free trade or World Trade Organisation terms.
Aside from Brexit of course, there remain plenty of other challenges facing the government.
The Conservative manifesto may have been scant on detail, but there were a number of new public spending pledges that sought to signal an end to austerity and make use of the so-called Brexit dividend. We await these with interest.
What does this mean for investors?
With the political deadlock over Brexit at last seemingly on the way to resolution, the outlook for investors appears more positive than it has for some time.
International investors who avoided UK assets in the aftermath of the Brexit referendum may be encouraged back to the market after the election result. While a stronger pound will hit earnings for multinationals earning their profits overseas, it should be positive for domestically-orientated companies.
However, it is important to keep the general election result in perspective, and prospects for investors are reliant on far more than Brexit alone.
The US presidential election is less than a year away. It remains to be seen whether Americans will continue to support President Trump’s brand of populism, while the US-China trade dispute drags on, and there is civil unrest in Hong Kong. However, in the run-up to the American election we would not be surprised to see the President focusing on strengthening the economy in the short term and coming to an agreement with China, which would give global trade a boost.
That is why we diversify portfolios across a wide range of assets and geographical regions, confident that if one area performs poorly, gains elsewhere should make up for it.
Whatever happens over the coming months, both with regard to the future Brexit negotiations and wider global events, we are monitoring events carefully and will react accordingly.
Guy Foster, Head of Research
Guy leads Brewin Dolphin’s Research team, providing recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. He is a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.
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