Early analysis with Will Bartleet, CIO and multi-asset portfolio manager at Pacific Asset Management
Last night the Conservative party won a decisive victory over Labour with the largest majority since 1987. With the final votes being counted, it is clear that Boris Johnson’s party will have sufficient control over parliament to leave the European Union on 31st January. This leaves eleven months to undertake trade negotiations which are due to be concluded by the end of 2020.
Impact on UK Equities
From a market perspective there are a number of implications of this election result. Firstly, for UK equities this removes the risk of Labour’s plan to nationalise a number of utilities below their market value and eliminates the prospect of companies with over 250 employees having 10% of their shares being passed to their staff over the next 10 years. This would have equated to a seizure of £300bn of shares in 7000 listed and private companies according to Clifford Chance. Removing the chance of these policies being implemented clearly has a direct benefit to UK shareholders. Equally importantly, the significant Conservative majority helps to remove the uncertainty that has been plaguing UK assets which will allow them to reduce the valuation discount to their global peers.
Impact on Currency
From a currency viewpoint, Sterling has already rallied some 10% from its low point in early September before today’s near 2% rally. The currency market had already been discounting the risk of hard Brexit and a Conservative victory and so further progress from here is likely to be more muted given the uncertainties that still surround the trade negotiations.
Impact on UK Gilts
Finally, the gilt market has sold off somewhat today as the threat of a minority government with limited powers to move anything forward has been removed. The Conservative government is now free to push through its £20bn fiscal stimulus plan which should help growth to pick up in the UK and therefore reducing the likelihood of an imminent interest rate cut from the Bank of England.
Impact on Portfolios
We have undertaken a number of changes over the last few months. Firstly, we have reduced our exposure to non-Sterling assets which are a headwind when the Pound rallies. We have also been increasing our exposure to UK equities given the margin of safety offered by assets that have been shunned by the global investment community. We hope that with much of the political uncertainty removed, that UK equities can outperform global equities going forward.
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