After the 2019 general election, the Conservatives have won a significant majority. Labour has suffered a defeat of historic proportions.
Markets have reacted strongly to the news, with domestic UK shares and sterling rallying. The election has provided markets with the certainty that the UK will be leaving the EU, while removing the risk of less market friendly policies such as nationalisation. Gilt yields have not reacted significantly, perhaps not surprising given that the outlook for the UK economy remains fairly soft and the Bank of England may cut interest rates next year.
However, attention is already turning to the next phase of the Brexit negotiations – those which will decide the shape of UK-EU relations in the decades to come.
While markets will be hoping for a close relationship between the UK and EU, it is too early to tell whether Boris Johnson will oblige them. A large majority may allow Johnson to pivot to a soft form of Brexit, ignoring Conservative hard Brexit associations like the European Research Group. Greater representation from the north of England, which tends to be more dependent on manufactured exports to the EU, may also pressure the Prime Minister into a closer trading relationship with the EU.
The very size of Johnson’s majority, and the concentration of the Leave vote under him, may allow him to pursue a hard Brexit, where the UK diverges more significantly from EU rules but obtains a lower level of access. This would pose significant challenges for manufacturers in particular.
Looking over the short term, the immediate outlook for UK assets is positive. The economy continues to expand, albeit weakly. However, temporary Brexit relief, a slightly brighter global picture, and the potential for higher government spending all offer support.
The rise in sterling may hurt investors with global exposure, but this will be offset to a degree by greater optimism around US-China trade tensions, with investors now hoping for a rollback in tariffs rather than just a postponement of further tariff increases.
Further out, we would be relatively cautious on the prospects for the UK. There are attractive opportunities, but domestic stocks will remain sensitive to news on UK-EU negotiations. Globally, economic data continues to stabilise and, with positive developments in areas like US-China relations, we remain cautiously optimistic.