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Article | 13 December 2019 | Investments
Britons voted on 12 December after parliament agreed to an early election. With voters hoping for an end to more than three and a half years of political paralysis that’s been weighing on the UK economy. Prime Minister Boris Johnson led the Conservatives to victory with a strong majority in the UK’s third general election in less than five years.
With Brexit such a dominant issue in British politics, voters were willing to forego their normal political alliances to try to ensure their side of the Brexit argument won the election, and many voted tactically in order to ensure Brexit is delivered.
What's the background?
The election might now be over but UK voters are still deeply divided over EU membership. With Brexit scheduled for 31 January, the Conservatives will have the duty to deliver it, redesign it, defer it, or drop it altogether.
Opinion polls throughout the run-up showed Johnson’s Conservative Party commanding a steady sizeable lead over the Labour Party.
There were a high number of undecided voters conflicted between domestic party policies and the polarising Brexit debate. This kept the outcome of the election uncertain, despite strong pre-election polling for the Conservatives.
Now that the election result is in, the focus will shift to the window for Britain to sign a trade deal with the EU. However the EU might scrap plans to complete this by the end of 2020, so the delivery date is unclear this timing uncertainty will likely keep the economy and markets jittery.
“If there is a majority of Conservative MPs on December 13th, I guarantee I will get our new deal through Parliament. We will get Brexit done in January” Boris Johnson’s election guarantee.
How will the election affect markets?
A Conservative win was always likely to be the most market-friendly outcome. We anticipate this will provide positive sentiment for UK shares (equities), but it will also be positive for sterling, which might undermine the sentiment boost, as FTSE heavyweights earn a significant portion of their revenues overseas. This encouraging outcome for equities is likely to be accompanied by stronger growth and inflation expectations, which could lift interest rates. This scenario is worse for UK bonds as a result. Corporate bonds may outperform government bonds, as they are less sensitive to interest rate movements, but this is all relative. They might still underperform cash.
We believe that, despite international interest in the UK election and Brexit, any ramifications will be felt mainly in the UK (and potentially Europe). Globally returns for 2019 have been very encouraging, but the journey has not been smooth. Risks such as US-China trade tensions and the ongoing Brexit saga have shown that markets can become turbulent very quickly.
Therefore, we retain 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.