Investment Strategies

The Conservatives' Decisive UK Result - The View From Brown Shipley

Shanti Kelemen 16 December 2019

The Conservatives' Decisive UK Result - The View From Brown Shipley

A UK wealth management firm reflects on the big poll win for the UK Conservative Party and what it means for domestic policy and the upcoming Brexit negotiations. Much ink has been spilled on the immediate effects, and the wealth management sector now has more clarity than it has had for some time.

As readers can imagine, we’ve been deluged with commentary about last Thursday’s UK general election and the Conservative Party’s decisive win, securing Prime Minister Boris Johnson a five-year term of office. The result has even prompted commentators in the US to wonder whether Democrats and Republicans will take any lessons from this result. Such is the influence of one of the world’s oldest parliamentary democracies. 

The following article comes from Shanti Kelemen of the wealth management house Brown Shipley. The editors are pleased to share these insights – the usual editorial disclaimers apply and we invite readers to react. The team will unpack some of the more specific implications for wealth management in coming days and weeks, such as what the result means for the treatment of high net worth investors, tax enforcement, spending and debt, and trade relations with foreign nations. 

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Just when we learned to stop trusting the statisticians, they managed to get it right. As predicted by opinion polls and betting markets, the Conservative Party won a comfortable majority with 364 seats. 

In the early hours of trading, markets reacted positively to the result, with the sterling/US dollar exchange rate rising, and corresponding increases in the FTSE 100 Index and the more domestic-oriented FTSE 250 Index. European equity markets were also up while bond yields strengthened slightly. We attribute these moves to expectations for more-business friendly policies and less uncertainty regarding the UK’s exit from the European Union. Labour’s market-unfriendly policies such as nationalising industries, raising corporate taxes and increasing union powers would have weighed on company earnings. 

The Conservative Party has achieved a clear majority, but it’s too early to declare “mission accomplished” for the UK. The Prime Minister, Boris Johnson, has previously said that Parliament will vote on the European Union Withdrawal Agreement bill before Christmas and leave the European Union by 31 January 2020. What comes next, though, is less clear. The focus will shift to  trade negotiations between the UK and EU. A deadline of December 2020 is set to complete the trade deal. The UK can request an extension but Boris Johnson has insisted it will not. Although there are recent templates (Canada and Japan deals) that can be leveraged off, trade deals typically take years to negotiate and ratify. 

Brown Shipley’s view is that we are sceptical that a trade deal can be completed in a year. In addition, it will need to be ratified by all 27 EU member states leaving ample room for last-minute brinkmanship from individual countries and regional parliaments. Don’t forget that in 2016, the regional Parliament of Wallonia (a region of Belgium) voted to block the original EU-Canada trade deal. We think sterling’s rally could come to an end if significant progress is not made on the trade negotiations in the middle of 2020. 

It’s not just about Brexit, though. How businesses, consumers and investors react over the coming months will shape the UK economy and markets. Government stimulus measures could provide a welcome boost to growth. Rate cuts by the Bank of England, although unlikely in the near term, cannot be ruled out at some point in 2020 should the growth outlook remain bleak.

In the long run, business investment is a key driver of economic growth. A recent survey from the Bank of England showed that as 2019 comes to a close, UK businesses are still planning to reduce investment. But will the election result change the outlook for businesses?

For some firms it has removed the uncertainty linked to some of Labour’s policies. For others, the elephant in the room remains Brexit and what trade relationship the UK will have in the future with the rest of the world. A move to World Trade Organisation (WTO) trade terms would be damaging for many UK businesses. 

Consumer spending is vital to the UK economy. It has been resilient over the past year and has helped prevent a recession. We expect this trend to continue for now.

The UK equity market has been out of favour with international investors since the 2016 referendum. In October 2019, a survey of fund managers by Bank of America Merrill Lynch put the UK equity market in last place for long-term investment prospects; only 3 per cent of respondents thought UK equities would deliver the best returns over the next decade. 

The election result could prompt some investors to rethink their views on the UK. The exit from the EU is now clearer and voters may not go to the polls again until 2024. The question, though, is how fast the attitudes of investors will change. We think there will be momentum for UK assets in the short term. However, we think many investors may wait for further clarity on the UK/EU trade deal before piling back into UK companies.

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