The scale of the Conservative victory caught investors by surprise
Thursday 19 Dec 2019 Author: Tom Sieber

Markets were already pricing in a victory for the Conservatives in the 12 December election but what caught investors on the hop was the scale of the victory. That resulted in a major share price rally for UK equities.

A landslide Tory win should offer greater political certainty after a long period of turmoil and there is an expectation that this will provide some relief for UK plc in 2020.

Stockbroker Peel Hunt comments: ‘The scale of the majority gives Boris and the Conservatives their clearest electoral mandate for over 30 years. There will undoubtedly be twists and turns in the Brexit process, but at least the direction of travel now looks clearer.

‘We should also have a fiscal stimulus in the February budget, a step-up in investment and greater confidence from consumers and corporates.’

DOMESTIC STOCKS SOAR

The election polls were fairly accurate this time, unlike the US presidential elections and the vote for Brexit in 2016. However the first past the post system made the ultimate result in terms of seats unpredictable and some polls suggested a hung parliament remained a possibility in the week of the vote itself.

As trading resumed in London after the results, UK-focused stocks mounted a charge. This was reflected in the performance of the FTSE 250 which at one stage was up by nearly 5%.

A look at the best performing shares on the FTSE 350 index on 13 December is telling with property plays, housebuilders, transport operators, utilities and banks all enjoying high single-digit or double-digit gains on the day. Additional gains, albeit on a smaller scale, were seen at the start of the following trading week.

SECTORS IN FOCUS

The real estate and housebuilding sector should benefit as the result gives the housing market a lift, with the Conservatives looking set to introduce policies to boost home ownership.

The expectation that the Tories will move to reinvigorate the economic fortunes of working class communities in areas which turned blue for the first time ever, or at least the first time in generations, seems to be giving MJ Gleeson (GLE) a particular lift.

The company specialises in affordable homes in the Midlands and North of England which helped deliver the big Tory majority.

The transport and utility firms were reacting with relief that Labour’s renationalisation policies are no longer a live threat.

Should the economy show signs of coming back to life, the financial sector could benefit from interest rate hikes, however recent economic data shows an increased rate at which the manufacturing and services sectors are contracting.

Against this backdrop the Bank of England will likely be cautious about moving too soon. Particularly as a replacement for governor Mark Carney, who departs at the end of January 2020, is yet to be appointed.

With the scale of the Conservative win becoming clear, sterling started to rally sharply, moving above $1.34 against the dollar and €1.20 against the euro.

STERLING’S SURGE HOLDS BACK THE FTSE 100

This explains the relative weaker showing of the FTSE 100 relative to the FTSE 250 – a strong pound affects the relative value of the overseas earnings which dominate the large cap index. Although positive news on trade relations between the US and China mean the FTSE 100 is still firmly on an upward path.

So can the rally for domestic stocks continue? Paul O’Connor, head of the multi-asset team at asset manager Janus Henderson, says: ‘The big picture is of a modest fiscal stimulus in 2020, boosting GDP growth by less than 0.5% in that year but with little additional thrust after that, given the pledge to balance the budget over a three-year window.

‘Compared to the typical Conservative governments of recent years, the Johnson administration seems likely to tilt fiscal stimulus more towards Government spending than taxation and more towards blue-collar Britain than higher earners and companies.’

The performance of UK-focused shares is also likely to depend heavily on what happens next with Brexit.

It now looks certain the UK will come out of the EU on 31 January 2020 but the fate of a trade agreement after the transition period concludes at the end of next year remains in the balance. And already the rally is losing some steam as an extension to the transition period looks increasingly unlikely.

The strong election showing of nationalist parties in Scotland and Northern Ireland could also put the union itself under pressure, opening up another source of uncertainty.

Investment trusts boosted by UK equity rally

Investment trusts with a strong focus on the UK stock market enjoyed a boost following the election result. The following table shows the best performers on Friday 13 December.

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