The results are in. Now what?
Boris Johnson has secured the biggest Conservative majority since Margaret Thatcher’s third election victory in 1987. The result will undoubtedly be seen as a personal victory for the Prime Minister and his rapid reshaping of the Conservative Party’s platform and outlook.
Arguably however, there are longer-term structural trends at play here too. One remarkable fact – little noticed by commentators – is that the Conservative share of the vote has now risen at each and every one of the last six general elections. That’s quite a streak.
At this election, the biggest gains for the Conservatives were seen in Northern and working class seats. One upshot of this may be that to try and hold onto these seats in the long-term, the government will need to make good on its promises to boost infrastructure spending in these areas.
A meaningful fiscal stimulus could be positive for the UK economy over the medium-term and so boost the prospects of smaller- and medium-sized companies. The share prices of these firms are often very dependent on the prospects for the domestic economy.
More immediately, without passing comment on the merits or otherwise of the Labour party’s plans, there is little doubt that the markets did not hold much enthusiasm for the prospect of a Jeremy Corbyn government – to put it mildly. That particular scenario will not now come to pass and many investors will be relieved that some of the more radical proposals affecting business will remain confined to the pages of Labour’s manifesto.
Markets tend to react well to the election of Conservative majority governments and we have already seen that this morning. The pound is up against other major currencies and UK shares have also gained – particularly those of companies with greater exposure to the domestic economy.
These trends could continue to play out over the weeks ahead as investors express their relief that the political gridlock and perceived threat of a ‘left-wing’ government are now behind us.
However, it is also worth pointing out that after we leave the EU in January – and this result makes it clear that that will happen – attention will likely turn very quickly to the fact that the government will then have only a few months to negotiate a comprehensive deal on the future of Britain’s relationship with the EU.
If you thought the negotiations on the Withdrawal Agreement had been difficult… well, it’s likely that ‘you ain’t seen nothing yet’. Sterling and domestic-facing shares may well lose some of their gains as investors express nervousness that the UK will leave the Implementation Period (during which time the UK will retain its existing economic links with the EU) with ‘no deal’ at the end of 2020.
It is well worth pointing out though that if that does occur, the overseas holdings in portfolios will make gains in Sterling terms while larger UK companies which earn a lot of their revenues overseas also tend to benefit from a weaker pound.
In short, this election result will end the beginning of Brexit. But there remains plenty more yet to come and the government will face a number of difficult economic and political trade-offs over the years ahead – something which arguably received little attention in the election campaign itself.
If you have any further questions about how today’s results may affect your investments, please get in touch.