Following the decisive victory of the Conservative Party in December’s General Election and the pledge to end the deadlock over Brexit, investors’ thoughts turned to the impact on financial markets and the opportunities and threats now arising across different asset classes.
With a workable majority, the Government should be able to push its version of the Brexit deal through the legislative process with little of the resistance faced by Theresa May in the last parliament. This could see Britain withdraw from the EU as early as 31st January under Boris Johnson’s revised deal.
The potential for Brexit without significant disruption 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. In this scenario households are likely to increase spending and businesses that are primarily exposed to the UK’s economy should receive a boost; most notably retailers, house builders, and some banks.
The finer detail of the UK’s future trade relationship with the EU has yet to be negotiated however and the exit process is effectively just beginning. Even with the passing of the withdrawal agreement, the UK could still leave the EU without a deal at the start of 2021 if trade negotiations do not proceed successfully.
Aside from Brexit of course, there remain plenty of other challenges facing the Government both domestically and on the world stage. The Conservative manifesto may have been limited on detail, but there were a number of new public spending pledges that sought to signal an end to austerity and make use of the so-called ‘Brexit dividend’.
Early indications suggest that the Government will increase borrowing to invest in infrastructure particularly in the Midlands and North of England in an attempt to address regional imbalances and the expectations of voters in former Labour seats won by the Conservative party at the election. On tax a modest rise in the threshold for National Insurance will be delivered and there is a promise not to increase Income Tax, National Insurance or VAT for five years, given the pressure to increase public spending other revenue raising measures cannot be ruled out. The Chancellor has now set 11 March as the date of the Government’s first Budget.
With the political deadlock over Brexit at last seemingly on the way to resolution, and the threat of a radical Jeremy Corbyn-led Labour administration gone, the outlook for UK investors had appeared set to start the New Year more positively than it has for some time. Geo-political concerns have though moved to the fore following the assassination of Iranian General Qasem Soleimani and markets are reflecting concerns about a possible new conflict in the Middle East and the impact that would have on the global economy.
Provided there is a de-escalation of tension and the focus returns to economic matters, international investors who avoided UK assets in the aftermath of the Brexit referendum may be encouraged back to the market after the election result. While a stronger pound will hit earnings for multinationals earning their profits overseas, it should be positive for domestically-orientated companies and the scope for further strengthening of sterling may be limited.
Recent international events highlight the importance of keeping developments in the UK in context and the prospects for investors are reliant on far more than Brexit alone. The US presidential election is less than a year away and it would not be a surprise to see President Trump focus on measures to strengthen the economy in the short term. The potential signing of a ‘phase-one’ trade deal between the US and China would also be viewed favourably by global equity markets for the coming year, along with continued support from central banks. While it would be unrealistic to expect returns to match those from 2019, low interest rates and low inflation accompanied by economic growth suggest that modest positive returns should still be possible.
8 January 2020