The clear victory of the Conservative party in the UK general election has significantly reduced the levels of uncertainty over the next steps for the UK, both politically and economically.
The pound was up 2.5% as the exit poll emerged on Thursday night which indicated a decisive win for the Tory party. UK stocks have risen across the board, partly aided by President Trump indicating that a US-China phase-1 trade deal would be signed imminently.
By mid-Friday morning the FTSE 100 was up around 1.8 per cent, and the more UK-focussed FTSE 250 by 4.3 per cent. Utility and banking stocks soared, with National Grid up 7 per cent and Lloyds Banking Group up 12 per cent. Housing stocks also gained, with Persimmon up 14 per cent. Royal Mail gained 10 per cent. This reflected the relief that Corbyn’s nationalisation plans wouldn’t materialise and the certainty that the decisive election result brought. The scale of the Conservative win produces a government capable of making and implementing decisions and allows Johnson to push a Brexit deal through Parliament while taking a softer approach.
This certainty should see an increase in business investment in the UK, which has been subdued over the past 3 years. The buying power of the pound has risen and is expected to continue to rise in 2020, meaning holidays and imports will cost less. The global outlook also looks more positive as US and China have agreed a trade deal ‘in principle’, which is important to the large number of UK businesses exporting goods and services. Safe haven assets, including UK government bonds (gilts), have retreated, with the price of the 10-year gilt down about 1%.
For investors abroad, UK assets have looked cheap but increasingly risky due to Brexit. Now these potential risks are diminishing, this boost to UK market sentiment is likely to see the flow of investment away from the UK reversing over the coming year. How much the UK bounces back will depend on the details of the trade deal with the EU, which has a current deadline of January 2020. If the Tories achieve this deadline with the determination and pragmatism they are promising, the investment outlook will improve further.