We assess the market impact of the potential General Election outcomes:
Labour and Liberal Democrat coalition could be the most favourable outcome for UK markets
Ahead of the much talked about General Election called for 12th December; we have polled our customer base to understand the views of personal investors. When asked which of the main parties best understand the needs of personal investors it is no surprise the overwhelming response is the Conservative Party, traditionally associated with this subset of the population, who are weighted towards being older males. It should also be easy to conclude their preferred outcome for this General Election would be a straightforward win for the Conservative Party.
However, preferred outcomes are not the same as expected outcomes and this General Election has many more permutations and combinations than any other with no single outcome expected to be a clear front runner. Given our customer’s responses and the consensus in the country as a whole, this is almost a single factor election – Brexit, even if politicians on their canvassing rounds tell us otherwise.
For investors and markets therefore, the eventual outcome will need an assessment of what it means for Brexit. Starting off with the simplest scenario and the most probable, an outright Conservative win and majority, investors will cheer at this prospect and expect a Conservative Government to be accommodative to some of their demands. These include incentives for savings and investments, increased ISA limits, reduced CGT and reduced stamp duties on share trading. Businesses would expect accommodative regulation and tax policies and some of the pent up investment capital will hopefully be put to work. An outright Conservative win means Boris Johnson’s deal with the EU will go through in Parliament, lifting the huge wall of uncertainty and releasing the variety of big decisions that individuals and businesses have held off doing, including moving homes, buying cars, investing in new equipment, to name a few. We would expect this pent up activity to lift spending and activity in the final month of the year and follow through into the first quarter. The stock market should no doubt welcome this as we have seen Sterling and UK-focussed companies experiencing a sharp recovery during October as Johnson’s deal gathered momentum.
However, the big question is what it means in the longer term and last week’s Bank of England interest rate decision and minutes gave us a somewhat official view of the Deal’s economic impact in absence of the Government’s impact assessment it refuses to publish (or carry out). The MPC acknowledged the lift to the economy in the short term, but they downgraded UK growth expectations for 2020 and 2021 with the lead cause being that the Deal restricts free trade and increases costs to businesses and consumers. The market’s reaction implies the BoE will need to step in and provide more assistance to the economy through another rate cut in 2020. Should the Conservatives win outright, I would therefore expect a small bounce in the stock market, led by the small and midcaps as well as those companies with greater exposure to the UK as a great deal of the uncertainty lifts. The medium term prospects do not look as rosy however as businesses assess the impact of the removal of free trade from the transition period onwards. My guess for the market would be a 1-4% bounce on Friday 13 with not much follow through thereafter.
Anything other than an outright Conservative win clouds the picture with Brexit. A minority Conservative government or Tory-led coalition may keep us stuck in a rut. In the unlikely scenario of a Conservative/Brexit party coalition, the current Johnson Deal will be all but dead and we would return to the high probability of a No Deal scenario again. Sterling would give up a large chunk of the gains made in October and maybe more with UK-focussed company shares also following south.
A Conservative-Lib Dem coalition has been ruled out by Jo Swinson and a Conservative-Labour coalition is unfathomable. The only other workable Conservative coalition possible would be the current one – with the DUP, and they aren’t happy about the current deal.
I don’t believe a Conservative coalition will be in the market’s interest in the immediate short term due to implications with Brexit, although a Conservative government will be business and investment friendly over a Parliamentary term. What about any permutations without the Conservatives in power, something our blue leaning investors cannot see beyond but is certainly a possibility? This and any thoughts of Jeremy Corbyn as the leader of the nation may already have some investor’s blood pressure on the up. For Capitalists, Corbyn means disaster – higher personal and corporate taxes, increased regulation, banker-bashing and limitations on bonuses as well as the threat of nationalisation for key industries – without adequate compensation. The prevailing view is a Corbyn or any far-left leaning Labour Government would be highly destructive to business, wealth and wealth creation – that is my view too, but this is no ordinary General Election as we have to look at the Brexit implications.
With Labour, a No-Deal scenario is dead – markets will welcome this but it will prolong some uncertainty as Labour will apparently put together a new softer deal and then put it to a referendum and fight to remain! In this scenario the question is how much value does the market place on the possibility of remaining in the EU against far-left policies. My initial thoughts are that the markets will not take well to Labour power upon the results on Friday 13, with utilities, banks and betting companies taking the brunt, but markets should recover in the weeks and months on the prospect of staying in the EU and aided by huge amounts of fiscal spending. The much maligned government contractors, Balfour, Kier, Costain and others could lead the recovery in stocks.
The more likely scenario than an outright Labour win is a coalition with the Liberal Democrats (Jo Swinson will have to defend herself against her pledge that she will not facilitate a Corbyn Government). In this scenario the question raised is whether we end up with revoke or another referendum, but either option in the market’s eyes is better than Johnson’s deal. If the market views that the Lib Dems can temper Labour’s hard left aspirations in coalition then it may be the outcome most desired by the market.
- GO UCITS Solutions Robo Global Robotics & Auto - being very international this AI and Robotics focussed ETF should march on as we adopt to new technologies
- First State Global Listed Infrastructure – huge spending pledges have been made by both leading parties and UK infrastructure is set to do well but this fund also gives some global exposure as a hedge.
- Schroder Income – A Johnson deal is a relatively hard deal Brexit in which case UK multinationals will provide a hedge against uncertainties in future trade negotiations with solid income.
- Avoid utilities, banks and gambling sectors
- Consider infrastructure, construction and government contractors, e.g. Balfour, Costain and Kier, as well as housebuilders
- AstraZeneca/Glaxo – UK based pharmaceuticals and healthcare companies will welcome a Government making huge spending pledges for the NHS, the risk here is that drugs prices might be questioned.
Labour/Liberal Democrat coalition Government:
- DB X-Trackers FTSE 250 ETF – The increased chances of no Brexit at all will lift the prospects of the more UK focussed businesses in the UK
- Smurfit Kappa – Environmental initiatives will hopefully be more in focus in a coalition, and so as a paper based packaging company, it is well placed
- Janus Henderson Index-Linked Bond - Inflation has painfully crept higher in past Labour governments, could we see the same again aided by Brexit being avoided altogether?
* We surveyed 1,192 of its customers online between 2- 6 November 2019
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.