UK Election: Pound and UK domestic stocks rise

The election result could be an important first step towards greater political and economic clarification.

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  1. Rob Morgan

A convincing victory for the Conservative party in the UK general election has provided a fillip for UK shares today.

Voters put their faith in Boris Johnson as leave-favouring voters coalesced around the Conservative party mantra of “get Brexit done”. Labour was handed a crushing defeat as they lost former strongholds in the North of England, the Midlands and Wales, and leader Jeremy Corbyn faces pressure to quit.

It was largest Conservative majority since 1987, partly as a result of the ‘remain’ vote being split between Labour and the Liberal Democrats in many constituencies. The Lib Dems failed to improve their overall number of MPs and leader Jo Swinson, who lost her seat, resigned as leader of her party. The main other winner overnight was the Scottish National Party. It won more than three-quarters of the Scottish seats, paving the way for renewed calls for another independence referendum.

The Conservative majority removes some political uncertainty as it effectively puts an end to the argument about whether the UK should change its mind about leaving the EU.  In all likelihood the UK now looks set to formally leave the EU on 31 January 2020. Even though uncertainty remains over upcoming UK-EU negotiations on the future relationship and the shape of any free trade agreement, the election result could be an important first step towards greater political and economic clarification.

Although a Conservative majority was widely seen as the most likely outcome ahead of the polls, the immediate market reaction was significant – largely due to the margin of the victory and that the breathing space the Prime Minister now enjoys. He should, ultimately, be in a position of flexibility in terms of the transitional timetable for the UK’s departure from the EU, reducing the risk of a ‘no-deal’ Brexit. In addition, the next Budget, expected in February, could be 'fiscally loose', offering heavy spending plans in areas such as infrastructure, and therefore stimulatory for the domestic economy.

The pound rallied more than 2% versus the dollar overnight to $1.34, the highest level since May 2018. Renewed resilience in sterling could help suppress UK inflation and bolster consumer spending.

The domestically-facing FTSE 250 rose 4% in morning trading, hitting a record high, and the FTSE 100 was up 1.5%. There were upward moves, some in double digits, in UK domestic shares including housebuilders, banks. Meanwhile, the disappearance of the perceived risk of a Corbyn-led government will be seen as a positive by many investors. Notably, utilities climbed as lingering unease over potential price controls or nationalisation under a Labour-led government evaporated. 

Many larger companies saw a more muted reaction with notable overseas earners such as GlaxoSmithKline and Diageo falling as a consequence of the currency move. For big dollar earners progress on a phase one US-China trade deal is likely to be more important than UK domestic matters.

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