News & Views

The UK Election result: The Polls were right for once20 December 2019

For the first time in over four years, the UK has greater political certainty following the Conservative majority win last Thursday. Boris Johnson won one of the largest working majorities within parliament, in years, allowing the party to look to implement Brexit and large fiscal spending plans.

What has happened so far?

The UK and Global markets have taken the result well. UK equity markets have advanced and UK Government bond yields have backed up.

From a currency point of view, Sterling has appreciated markedly since the result. It is slowly moving back towards the levels seen pre the BREXIT vote in 2016. The graph below shows the initial move down in Sterling post the 2016 Brexit vote and how it has been strengthening close to and post the election result.

Source: Bloomberg December 2019

Stocks have continued to advance since the result with mid-caps and domestic stocks leading the way. UK Banks, Construction companies, Retailers and Industrials have risen because a political resolution has occurred. Markets are pricing in better growth prospects, large fiscal spending packages and a stable political environment over the coming years. Below shows the sharp increase in the FTSE 250 post the election result. Being a more domestic index, the FTSE 250 gained a greater amount from the certainty generated as a result of the election result.

Source: FE Analytics December 2019

So, what next for UK markets and our UK holdings?

The longer-term implications for the UK market are still relatively opaque, but a clearer picture is starting to emerge. With a working majority, Prime Minister Johnson will push through the Brexit timetable with the UK leaving on the 31st January. We will then have until the end of 2020 to form a deal with the EU. Whether an extension can be passed will be down to whether Boris Johnson amends the extension bill currently passed by parliament.

We do believe that the UK stock market is currently still significantly undervalued. This presents longer term opportunities for investors which we are continuing to pursue. We believe having a focus not just on large cap UK stocks, but also mid and small caps will provide the best opportunity for investors. As the graph below shows, the UK stock market is the cheapest it has been for years and this is something we are looking to exploit. Long term, we believe that the lack of investment in the UK will reverse and international as well as domestic investors will increase their allocation now more clarity has been formed. Our overweight position should be beneficial to overall portfolio performance.

Source: JPMorgan Asset Management 2019

From a fixed income and currency point of view, the UK Gilt market is currently majorly overvalued. The unknown BREXIT risk has been removed and so we believe Gilt Yields should continue to rise. This makes Gilts currently unattractive with such low yields. Other UK fixed income is still attractive on a selective basis. Banking Credit looks cheap, as does other selective corporate credit. The fixed income managers currently utilised within the portfolios should be exploiting these pricing anomalies to gain alpha for their underlying funds.

Regarding sterling, we have believed now for some time that there is a chance that Sterling could strengthen somewhat overtime and so we have had hedges in place to combat this. We still believe Sterling may appreciate further. To counteract this, we continue to hedge certain assets where taking currency risk does not favour the end investor. All our credit holdings are sterling hedged, as well as our alternatives exposure within infrastructure. We also partially hedge our equity exposure when it is cost effective to do so. We do not believe we are currency experts, however, having some form of currency hedging in place does reduce the risk for underlying investors.

In conclusion

For the first time in a long time, the polls were correct as were investment markets pricing in the election result. There are still risks in place from Brexit and other global political issues. However, we are happy to take some risks from the UK market being as cheap as it currently is. Political noise will create volatility, but the longer-term picture doesn’t look as bleak for the UK market now.

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