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Election result: What impact on investment?

13 December 2019

In reaction to the Conservatives winning the General Election and securing a majority Government, this morning sterling rallied strongly quickly achieving a 19-month high against the dollar and a three-year peak against the euro, while the FT250 rose 4% at market open.

But Matthew Jennings, investment director, Fidelity International said this reflected the markets “breathing a sigh of relief rather than starting a full-blown Christmas party”.

He said: “The tail risk of an anti-business Labour government is now obsolete, which has led to a relief rally in politically sensitive sectors such as utilities and banks. However, once the dust settles, investors will remember that the UK still has no trade deal with the EU post-Brexit, which is likely to limit appetite for UK assets.”

Sajiv Vaid, fixed income portfolio manager, Fidelity International added that Brexit uncertainty “is very much here to stay” with investor attention inevitably turning next to the next round of negotiations for a further extension by mid-year and a trade agreement by the end of 2020.

“The extent of the majority may well give the Conservative government some more flexibility with regards to the negotiations and be less confrontational and recede the ‘cliff edge risk’ that some feared.”

Looking at the possible impact of the Election result on particular investments, Vaid said: “Gilts are likely to sell off modestly, pushing yields on the 10-year higher to around 0.9%. Despite the conclusive election outcome, the implications for short rates is not clear cut as growth remains weak and the prospect of the fiscal stimulus is still unlikely to boost growth above 1% for 2020. The strength in the currency will also act as a dampener on inflation. On the back of this uncertain outlook, we believe that the Bank of England will remain cautious and see the possibility of a rate cut in 2020.

“With investors deploying cash to reduce their underweights in sterling asset, we expect a modest rally in credit and sterling high-yield to perform particularly well having been a marked underperformer.”

In terms of sectors he highlighted utilities, now unburdened by “nationalisation fears”, as a sector that should perform strongly “as they regain their safe haven status in an environment characterised by domestic and global uncertainty.

“More broadly, structural factors such as high global debt, demographics and rising inequality will keep rates low in a historical context. Additionally, late-cycle dynamics and unresolved geopolitical risks keep us cautious on risk assets.”

Vaid added that to shelter the portfolios from these risks, Fidelity was biasing towards “higher quality parts of the credit market and focusing on defensive companies with stable cash flow generative business models.”

Domestic earners

Alastair Mundy, portfolio manager, Investec UK Special Situations Fund said the new Conservative Government should bring resolution to whether Brexit will go ahead and therefore “favours domestic earners over international earners”.

The reasons for this, he said, were:

  • Sterling could strengthen.
  • We are due a budget, in which we would expect to see voters thanked for making the ‘right’ decision, and in which the government could commit to higher fiscal expenditure.
  • Many consumers and companies have probably been delaying consumption and investment, so we could see a rebound in activity.
  •  Overseas bidders will be more confident of the economic outlook and may seek to buy up cheap UK assets.
  • International equity buyers, who have probably been avoiding UK equities and particularly domestic earners, may be tempted (or forced) back into the market.

With the Special Situations Fund holding positions in UK-centric banks, builder’s merchants, UK retail, UK food retail, DIY and housebuilding, Mundy said he expected the newly elected Conservative government to be “positive for the strategy”.

Santa rally and risk in 2020?

Adrian Lowcock, head of personal investing at Willis Owen, said that while the FTSE 100 “would be expected to fall in reaction to a strengthening pound”, the Election result combined with positive noise around US/Chinese trade negotiations, should be “a positive combination”.

“This could be the start of the Santa Rally for 2019.”

However, Stuart Clark, portfolio manager at Quilter Investors, did not share that enthusiasm. He said that while there had been an immediate repricing of GBP, which would be expected to follow through into the more domestically oriented parts of the market, the “new found confidence” could quickly fade, “with the realisation that the Prime Minister has an enormous amount of work to do to ensure the UK does not inadvertently leave without a deal before the end of the transition period, which is currently slated for the end of 2020.”

Clark said: “It remains to be seen whether Mr Johnson is committed to that date and a ‘hard Brexit’, or whether the strength of this victory allows him to step back from the harder right and negotiate a closer working relationship with the EU.

“This trade deal negotiation process does seem to be a risk that is currently ignored by markets, instead deciding to focus on the short-term, looming Brexit deadline.

“The combination of this result and the potential delay to further tariff increases between the US and China leaves a positive environment for riskier assets in the immediate term but Investors need to make sure they are positioning themselves for further volatility to enter the UK and global markets through 2020.”

Architas added in a note that it’s managers were retaining “a good degree of caution in our investment approach”.

“We’ve not been betting on outcomes. Due to the high level of uncertainty we’ve aimed to diversify portfolios to withstand whatever shocks may arise. We continue to believe that being diversified across a range of different asset classes is the best approach to take.”

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