What the UK election results mean for markets and investments

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Personal Investing Team

Finally, investors have received some certainty over the Brexit process – at least over the near term.

The UK’s third general election in less than five years is finally over. And we now know that Boris Johnson’s gamble has paid off: the prime minister’s Conservative party has won a strong working majority with which to pursue its Brexit strategy.

 

Snap reactions to the snap election

The result of the snap vote dramatically increases the chances that the exit deal will be approved over the coming weeks. The proposed increase in government spending laid out in the Conservative manifesto has also boosted the UK economic outlook.

 

For 2020, the election result all but removes the chances of second referendums on EU membership and Scottish independence. The clamour for the latter, however, is only likely to grow in the coming months in light of the strong performance by the Scottish National Party.

 

And significant questions still remain as to the next stages of the Brexit process, not least the timeline for agreement on a ‘future relationship’ with the UK’s European partners. Indeed, given the relatively brief amount of time left for these talks, we expect the new UK government to request an extension to the transition period beyond the end of 2020.

 

Here's what to look for

Sterling to further strengthen but with a ceiling: The dramatic gains made by the pound sterling on election night will be seen as good news for UK stocks that do much of their business here in the UK. However, for the UK’s largest companies which sit in the FTSE 100, the boost from improved investor confidence to their share price is likely to be more muted as much of their earnings come from international markets.

Bank of England to leave interest rates where they are: Despite a near-term improvement in investor and business sentiment, we do not expect the Bank of England to raise interest rates next year. This is due to the level of inflation stubbornly staying below the Bank’s 2% target and the market’s lingering concern about the trajectory of the UK and global economies.

UK government bond interest rates likely to rise: Given the rosier prospects for the economy over the next few months, the level of interest rates paid on UK government bonds are likely to rise further. This will also be supported by the chances of the government increasing levels of borrowing in order to fund the proposed spending plan

 

 

Looking abroad

While much of the UK was watching the 10pm exit poll, President Trump announced that the US and China had moved closer to an agreement on trade in order to avoid another round of tariffs which would have come into force. While UK markets may have seen an election-related boost, Asia and European markets will likely benefit more from this positive development in the trade war.

As we wrote back in October, with the president under significant political pressure as a result of the impeachment proceedings, finding a quick solution to the US-China problem can deliver him a crucial win and a boost to global investors’ returns.

 

As always, focus on the long term

While short-term events such as elections and presidential announcements can rock markets, investing is always a long-term journey.

Filtering out the noise and focusing on what’s really driving markets over five, ten or even twenty years is by no means easy but keeping a calm head and an eye on the emotional biases to which we’re all prone can go a long way to giving you the best chance of investment success.

Keep an eye out for when we’ll be posting about the key things to watch out for in 2020 and the larger trends that are changing the investment landscape.