Relieved investors piled into sterling as soon as exit polls last night showed the Tories were on track to win a decisive majority in the House of Commons. This breaks down barriers to Brexit - though wealth managers say there remains much to do in negotiations. The result was also a blunt repudiation of the hard-left agenda of Labour's Jeremy Corbyn.

Sterling today steadied against the dollar above $1.345 after surging to a 19-month high, up from $1.30 in the past eight or nine hours, with traders relieved that Boris Johnson’s Conservatives had decisively beaten the hard-left Labour opposition of Jeremy Corbyn. 

As of the time of going to press, the Tories were on course to win a majority of more than 70 seats, their best showing since the Margaret Thatcher premiership, in 1987. In Scotland, the Scottish National Party fared well, raising questions over whether that country might push again for independence from the UK. Meanwhile, Corbyn was reportedly stepping down as leader. (Update, the actual majority achieved was 80.)

Against the euro, sterling rose as high as 82.80 pence, up by more than 2 per cent on the day, reports said. In the equity market, the FTSE 100 futures inched slightly higher. Media market reports said yields on UK government bonds, aka gilts, are expected to rise as investors move out of safe-haven equities into the stock market.

The result prompted wealth management analysts to start speculating how and when the UK’s departure from the European Union will now proceed. Investors seemed convinced that the UK will leave the EU bloc, in which it has been a member since 1973, by 31 January next year.

The removal of a potential Corbyn-led government, or a coalition with the Scottish Nationalists and other minority parties, relieved investors worried about his manifesto plans. Labour had wanted to nationalise major utilities such as water and electricity, seize a percentage of shares in firms above a certain size, tax top-earning individuals more heavily, and intervene more heavily in the economy. (In any event, it should be noted that the UK’s tax burden as a share of GDP is at the highest level since the Labour administration of Harold Wilson.)

At around 10 pm UK local time exit polls from the major TV broadcasters flagged that the Tories, who had gone to the polls to secure a working majority after languishing without one for many months, were on course to win by more than 80 seats. Scores of traditionally Labour constituencies in the North and Midlands areas of the UK fell, upending decades of Labour control. At the same time, Tories suffered some setbacks in London – a heavily pro-Remain area around the Brexit issue – but crucially, held seats such as Westminster.

Attention is now likely to swiftly turn not only to the UK’s negotiations about Brexit, but the kind of domestic economic and social policies that a strong centre-right administration might enact. With the Tories faring well in some poorer areas where globalisation and unlimited immigration wasn’t popular, the government is under pressure to help such areas without caving into protectionism and heavy spending.

“As we saw throughout the campaign, the pound tended to tick higher against the dollar on signs of a Conservative majority. On the basis of this exit poll, sterling has skyrocketed,” Dean Turner, Economist at UBS Wealth Management, said. “As we predicted, the pound has now risen to 1.35 against the US dollar, and we’ve long held a bullish medium- to long-term view on sterling versus the dollar due to attractive valuations and structural factors. Gains beyond 1.35 in GBPUSD, though could be more challenging as the next phase of the Brexit negotiations ensues.”

Source: Xe.com
 

A large parliamentary majority for the Conservative Party means that Johnson can bring the withdrawal agreement negotiated with the EU through the House of Commons in January. The European Parliament then has to give its approval. The latter, however, is unlikely to be more than a pro forma issue, VP Bank, the Liechtenstein-based group, said in a note. 

“Next on the agenda is the negotiation of a comprehensive free trade agreement. It is hard to imagine, but the negotiations on future relations are likely to be even more complex than the ones on the EU withdrawal. Negotiating free trade agreements usually take years. However, the UK's transition period ends at the end of 2020. It is almost utopian that this deadline can be met,” the bank cautioned.

Guy Foster, Head of Research, wealth manager Brewin Dolphin, said: “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,” Foster said.

“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,” he added. 

Gary Dugan, of the Global CIO Office, said: “Not even a full moon and the prospect of Friday 13th could stop the UK from finally achieving certainty. Brexit for certain, and the first majority government since the summer of 2017. The UK will feel very different in the morning. It will know where it is going. No one should underestimate the degree to which it helps kick-start the UK economy after the shambles of recent years. Companies can finally plan for the future with the knowledge that the UK will leave the EU. While the trade negotiations with the EU could still be fraught, the certainty of Brexit will allow businesses to finally move ahead with decisions to invest and hire people. There should be an immediate feel-good factor in the economy that was so lacking for the past three years.”

Other reactions
“This decisive General Election result could deliver a massive adrenaline shot into the UK property market. Expect a sharp uplift in transaction levels starting early in 2020, as buyers and sellers who have played it safe put their plans into motion,” Andrew Montlake, managing director of the UK-wide mortgage broker, Coreco, said. “Spring for the property market could come early after this comprehensive election victory. There is a huge amount of pent-up demand out there that looks set to be unleashed on the market next year.”

“While the improved clarity on the Brexit situation is a positive, 2020 is likely to remain a complicated year of negotiations and roller-coaster headlines. As such, some uncertainty will persist and both UK and European assets, as well as sterling, could remain volatile,” Esty Dwek, head of global market strategy, Natixis IM Solutions, said. 

“In addition, with this majority Mr Johnson is also expected to overhaul many institutions, and focus on reviving growth, which has shown increasing signs of fragility. Finally, with the Scottish National Party winning 55 seats, a strong showing, a new election on their independence is likely to be announced,” Dwek said.