Investment directors and senior management figures across the asset management sector have provided their responses to the Conservative Party’s electoral success, with the incumbent prime minister Boris Johnson securing a projected majority of 80 seats.
In particular, industry experts have pointed to the reaction of sterling to the surprisingly comfortable majority won by the Tories. In the past 12 hours, sterling has since reached its highest valuations compared to the US dollar and the Euro since June 2018.
Andy Scott, associate director at JCRA, noted the strengthening performance of the UK’s currency but argued that the largest political challenges for Boris Johnson still laid ahead and could still provide the government with significant challenges.
He said: “Following the Conservative landslide victory, sterling is trading this morning slightly off its peak that was reached in the immediate aftermath of the very surprising exit polls. As the dust settles from a momentous evening, the reality that a very big challenge of negotiating the future trading relationship with the EU still lies ahead, appears to prompt some early caution in European trading.
Forecasting the future, the associate director added: “What will be interesting to see - assuming that Brexit will now follow a set course, at least through January 31 – is if economic data is a) given a significant boost from the perceived certainty and b) starts to influence sterling again. In recent months, the market has almost completely ignored the slowdown in the economy and the potential for monetary stimulus from the Bank of England, with election and Brexit expectations driving fluctuations in sterling’s value. With the currency now reaching what are somewhat neutral levels against the US Dollar (1.35) and the Euro (1.20), the performance of the economy is likely to be key to whether we see a further recovery in 2020.”
AJ Bell investment director Russ Mould was impressed with the performance of sterling, however he acknowledged that the improved performance currency would present difficulties alongside opportunities.
He said: “The pound’s surge to a 19-month high against the dollar at around $1.35 and a three-year peak against the euro north of €1.20 is grabbing all of the post-election headlines but sterling’s gains are also putting a bit of a lid on the FTSE 100. A strong pound decreases the value of the overseas profits generated by the multinationals of the FTSE 100 once they are translated back into sterling.”
He also believed that the rising British currency could be well received by stock market sectors such as general retailers, food retailers and the travel and leisure sector.
Mr Mould said “This helps to explain why International Consolidated Airlines, Next, TUI, Dixons Carphone and AB Foods are all prominent risers in early trade.This is because a strong pound may cap imported raw material costs for them and also tamp down inflation more generally, putting more money in consumers’ pockets on a real-term, post-inflation basis. In addition, a perky pound means it is cheaper to travel abroad than would have otherwise been the case, something which could benefit tour operators and travel agents.”
Phil Smeaton, chief investment officer at Sanlam UK, also spoke positively about the increased value of the pound.
He said: "The 2 percent surge in the pound brings it closer to fair value on a purchasing power parity basis, and we can expect the flight to safety in government bonds unwind slightly. Inflation expectations may tick higher as Boris implements his fiscal spending plans, which would be another reason for economic growth to accelerate. Just as the US market took off after Donald Trump’s market friendly policies were analysed, we may see the UK stock market benefit in much the same way in Britain.”
He also argued that the result meant investors in the UK could relax, which was a theme echoed by several commentators.
“As far as equity markets are concerned, this is a favourable outcome. Removing the uncertainty around Brexit in the UK will free businesses to unleash a surge in investment, and consumers should once more feel confident enough to spend their well-deserved wage gains. Investors in the UK can relax as their taxes remain unchanged, and global investors are likely to feel comfortable enough to commit capital to one of the world’s cheaper equity markets,” he explained.
Matthew Jennings, investment director at Fidelity International shared a similar outlook on the result.
He said: “What we are seeing this morning is the market breathing a sigh of relief rather than starting a full-blown Christmas party. The tail risk of an anti-business Labour government is now obsolete, which has led to a relief rally in politically sensitive sectors such as utilities and banks. A Conservative majority remained the expectation throughout, but investors were taken by surprise at last night’s exit poll and the extent of the conservative majority. Sterling rallied strongly and is on course for one of its best trading days in recent years. The Brexit battered domestically-focused FT250 soared four percent at market open."
He did, however sound a word of warning about the lack of an agreed post-Brexit trade deal with the EU.
"However, once the dust settles, investors will remember that the UK still has no trade deal with the EU post-Brexit, which is likely to limit appetite for UK assets," he said.
Tim Graf, head of macro strategy for EMEA, State Street Global Markets, offered a dissenting view on the election result. He was more sceptical of the preojected ramifications of the election result, the improved performance of the UK’s currency against the Euro and the US dollar, and suggested a “Hard Brexit” remained on the cards.
He said: “Our view is that there is not a lot of upside for sterling left. Our purchasing power parity-based valuation framework puts fair value for sterling against the US dollar at 1.3340 and the euro against sterling at 0.8670. Sterling is now rich versus the other currencies for the first time since the referendum. I can see fair value shifting a bit more in sterling’s favour, as recent strength should have a dampening effect on inflation. In time, that could move those fair values towards 1.36 and 0.84 respectively. But again, we aren’t talking about significant future strength. We are then left with a post-election environment where a harder version of Brexit is possible, perhaps probable.'
