General election 2019 – What next?

Getting Brexit done

This majority now gives Boris Johnson the ability to meet his campaign promise of signing a withdrawal agreement and taking the UK out of the European Union (EU) by 31 January 2020. With this Rubicon crossed, the UK will enter a transition period with the EU where negotiations on the future trade relationship will begin.

Mr Johnson has stated his confidence of getting a deal signed by the end of next year, when the transition period ends, but there are hurdles on the path ahead.

Details on the content of the transition negotiations are unknown and the history of Brexit has shown that agreement can be hard to find. We won’t get a real sense of how these negotiations will proceed until later in 2020.  The UK has until 1 July to request a further extension, and this decision is at the discretion of the government.

Today’s vote is an important pit stop on the road to Brexit as it clears the road forward for investors, but uncertainty is likely to linger for some time yet.
 

What next for investors?

While a Conservative win is likely to be good news for UK domestically oriented equities and other ‘risk’ assets, this outcome had already been priced in to some extent. In fact, we may even see some profit taking and an initial fall in the value of the large, export-driven companies in the FTSE 100 in response to the 2% rise in the pound overnight, which can reduce the value of overseas earnings.

The recent 6% rise in the value of the pound at the beginning of October coincided with a fall in the FTSE 100 while European and global equities rose by around 3%.

The pound has already appreciated against the dollar and the euro in the last few weeks, but further momentum, based solely on Brexit news, may be more of a struggle from now.  It's likely we could also see an initial fall in UK government bonds as investor appetite for riskier assets increases.
 

The longer-term outlook

We should see some improvement in economic activity over the next few months as companies release some of the investment they’ve been holding back while waiting for political clarity. This could be influenced by the progress of the transition talks, which may encourage or discourage any potential growth impulses.

Economic growth is likely to nudge upwards somewhat, albeit from historically low levels. The economic stimulus promised in the Conservative election manifesto is relatively modest, and so longer-term growth will rely on UK plc.

Average UK GDP growth has been 2.5% since 1960. Growth was 1.4% in 2014, and predicted to be 1.2% in 2020 (Bank of England).

In these circumstances, the Bank of England will be looking for clear signals before moving on interest rates. At the last meeting, we saw two votes in favour of cutting rates, and committee members will doubtless follow trade negotiations with interest. For the time being, we continue to expect rates to stay low, particularly as inflation is already low and any rise in the pound may push it even lower.

The last time the Bank of England increased interest rates was August 2018.

What does the election result mean for Coutts investors?

It’s important to remember that the UK represents just one element of our globally-diversified funds and portfolios. We invest in markets across the world to reduce risk and profit from opportunities wherever they arise.

The average balanced portfolio at Coutts holds 18% of assets in UK equities and 33% of assets in global equities.

The global economy has a greater influence on our strategy and investment returns than what happens in the UK. Global economic momentum in general and the agreement on a 'phase one' US/China trade deal yesterday, in particular, are important drivers as we enter 2020.

Estimated US GDP in 2019 is $21.5 trillion, while in China it’s $27.3 trillion. The equivalent figure for the UK is $3.1 trillion.  (International Monetary Fund, using purchasing power parity)

This result could well open up opportunities in the UK. For example, the pound has the potential to strengthen further in the long term. The benefit to the UK economy of some renewed political momentum should be positive for growth and stocks exposed to the domestic market.

Continuous analysis of risks and early insights into trends and opportunities will be key in the months ahead.

If you would like to find out more about how Coutts could help you manage your wealth, please don’t hesitate to get in touch with your private banker.