UK election: what does the result mean for the economy and investors?
12 December 2019
Boris Johnson has been confirmed as prime minister after the Conservative party made sweeping gains.
The Conservative majority government has three key implications for Brexit, which is the most pressing issue for the UK economy. First, it all but guarantees that the UK will leave the European Union (EU). This election was the last barrier to Brexit, and pro-Remain parties failed to build a voting coalition to back them.
Second, the Withdrawal Agreement will be passed. With over 360 seats and a fresh mandate, Prime Minister Johnson will have plenty of scope to pass the Withdrawal Agreement in January. This will provide certainty for Northern Ireland’s economic relationship with the EU.
Third, the prospects for the UK economy remain very uncertain. The free trade agreement to be hammered out is likely to take much longer than the current one-year timeline. Importantly, EU member states need to approve any trade deal. Those members will have their own preferences about the trade agreement so a full trade deal in the short term seems highly unlikely.
Two other clear trends have emerged. The Labour party lost huge ground in former strongholds in northern and midlands ‘Leave’ constituencies. This reflects voter dissatisfaction with the party’s ambiguous Brexit policy and its ongoing challenges with anti-Semitism.
Meanwhile, in Scotland, the SNP has picked up 13 seats. This will embolden calls by the SNP for another Scottish independence referendum. However, a legal referendum would require UK parliamentary approval. The Conservative government is unlikely to provide this, given the focus on getting Brexit done and the unionist stance of the Conservative party.
Looking at financial markets, the solid majority for the Conservative party has led to early strength in sterling, as there is now more clarity about the path for the UK’s relationship with the EU. However, one should not forget that sterling is now up over 10% since the August lows. For sterling, it may prove to have been better to travel than to arrive.
The UK equity market has opened up around 1%, but on a day that equity markets across the world are up due to the potential for a US/China trade deal. UK equities have lagged their global peers over the past few years. Investor surveys, positioning data and some valuation measures have suggested that there has been some element of a ‘Brexit discount’. Greater clarity on Brexit may allow some of this discount to narrow.
The gilt market has been relatively unmoved by the result. The greater spending pledges contained in the Conservative manifesto have not worried gilt investors so far. It will be important for the incoming government’s plans that this sanguine view from bond investors continues.
It should be noted that the Bank of England has appeared to have a greater predilection to raise interest rates than most of its global peers. The Governor and the Monetary Policy Committee will no doubt carefully assess the implications for the government’s investment-led growth strategy.
Although the outlook for all UK assets may be clearer, it is still not clear. If the past few years have taught us anything it is that investors should be wary of bumps in the road, both expected and unexpected. It remains wise to be watchful of the road ahead.