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Conservative win sees pound and markets soar

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Written by: Paloma Kubiak
13/12/2019
The Conservative victory has seen sterling bounce back and UK domestic stocks rally as investors regain confidence in the market.

The pound surged to $1.35, the highest level since May 2018 while it also reached a three-year high against the euro, climbing to €1.20.

This helped the FTSE 250 trade nearly 5% higher. However, the FTSE 100’S gain was more modest at 1% due to the blue-chip index having a majority of overseas earners. Once profits are converted to sterling, a strong pound decreases revenue.

Below, industry experts share their reaction to the Conservative victory and what this means for investors.

‘Softer Brexit could be on the cards’

Darius McDermott, managing director of FundCalibre, said: “This is exactly the result Boris Johnson was hoping for. He will now have more freedom to negotiate with the European Union, and a softer Brexit could be on the cards – but at least finally in sight.

“The UK stock market is likely to rally now, as will the pound, as confidence returns. Domestic-facing businesses and smaller companies in particular should do well.

“In contrast, the larger overseas earners in the FTSE 100 may suffer a little due to the currency reversal. However, this may be mitigated in time by overseas investors returning to our shores and once again investing more broadly in the UK stock market.”

‘Check your current geographical exposure’

Emma Wall, head of investment analysis at Hargreaves Lansdown, said: “Investors who were brave enough to go long domestic equities – and in particular anything under nationalisation target from Labour, such as utilities and transport – should be rewarded.

“While there will be enticing currency and market moves over the next hours and days, it is still very early days for the new government. As ever, investors looking to play politics should be wary. Even the professionals get these kind of macro market calls wrong. Investors all over the world often have a portfolio bias towards their domestic market, so before you pile into UK stocks now there is more certainty around, first check your current geographical exposure. Lack of diversification can lead to greater problems down the road.”

‘Longer-term still remains uncertain’

Russ Mould, investment director at AJ Bell, said: “Johnson’s party victory removes several key risks that have been hanging over the UK stock market.

“It removes the threat of Labour trying to renationalise many sectors, explaining why shares in Royal Mail jumped 8% to 250.4p, transport companies rallied – Go-Ahead up 7% to 135p and Stagecoach up 14% to 150.5p – and utility stocks were back in fashion, including Centrica up 14% to 92.04p.

“The market is now digesting the prospect of a stronger UK economy as a result of the Conservative victory which explains why shares in banks, housebuilders, leisure companies and retailers jumped following the General Election news.

“Banking group Lloyds soared by 12% to 68.43p, housebuilder Taylor Wimpey advanced by 11% to 192.5p, pub company Marston’s moved 5% higher to 130.6p and retailer Next rose 5% to £71.86.

“Among the big foreign earners tobacco company Imperial Brands fell 1% to £16.70 and support services group Bunzl eased back 0.5% to £20.61.

“Short-term the Conservatives have discussed increased spending which could give the economy a boost. Longer-term still remains uncertain and so markets are not going to keep opening bottles of champagne to toast a new dawn for the country.”

‘Inflation is likely to slow’

Aneeka Gupta, associate director, research, at WisdomTree, said: “Inflation is likely to slow as the pound strengthens raising the case for an interest rate cut at a later stage. We expect higher yields across the curves in the gilt market on a combination of diminished near term rate cut expectations and a lifting of safe-haven demand.

“In light of the extent of the pound’s rally, we don’t expect the FTSE 100 to perform as well as 80% of revenues are generated overseas. However domestic stocks which have outperformed since early September are most likely to gain a tailwind from today’s elections results. Broader European equities are also likely to trade higher; in particular we expect the financials which have been strongly correlated to “no-deal” Brexit risk to outperform in the near term.”

‘Government bonds are expected to take a hit’

Tom Stevenson, investment director for personal investing at Fidelity International, said: “Looking beyond the initial market response, there remain question marks over the sustainability of any rally given the ongoing uncertainties in the Brexit negotiations.

“Other factors for investors to consider include the likely pressure on the new Government to increase spending in order to deliver on campaign promises. This could stimulate economic activity and encourage more business investment, but it could also increase borrowing and it is not clear how the market will weigh up those conflicting forces.

“Domestic stocks are expected to do better than the FTSE 100’s international-facing shares, which could be held back by a stronger pound which will make exports less competitive and reduce the value of overseas earnings. Government bonds are predicted to take a hit as a more optimistic economic outlook starts to be reflected in higher yields, which move in the opposite direction to prices.”

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