Strategy & economics

UK Election 2019: what will potential outcomes mean for the pound, shares and other assets?

Much may change between now and polling day on 12 December, but this is how we see the likely response of markets to possible outcomes.

25/11/2019

Investment Team

The pound, UK shares and other UK assets have underperformed in recent years, thanks largely to the uncertainty caused by the 2016 referendum and subsequent Brexit wrangling.

The 2019 election offers some hope of greater clarity and markets are watching closely.

The Conservatives' lead over Labour is growing , according to the latest polls. But there are high levels of "undecided" respondents – and there are still many weeks to go until polling day.

A hung parliament could create further uncertainty. But a majority for either Labour or the Conservatives could usher in new tax and policy measures, as well as having implications for the future direction of Brexit.

No-one can predict either the election outcome or investors' responses. We provide below our views on the likely market response to a Labour or Conservative majority, based on what the parties have said so far and market observation. For each asset class we indicate a range of relative negative or positive responses.

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Conservative majority

 
 
 

Impact on £

  • With a greatly reduced risk of a no-deal Brexit, sterling may strengthen marginally given lower political risks.
  • However, even with a withdrawal agreement in place, uncertainty around trade agreements may limit sterling strength.
 
 

UK equity large cap

  • A Conservative majority may remove uncertainty around the direction of Brexit. Whilst the market might welcome greater clarity in the short term, the removal of the possibility of a "no deal" Brexit currently already looks priced in.
  • May result in an increase in capital expenditure leading to higher economic activity.
  • Improving sentiment may also boost consumption.
  • Planned fiscal spending may be beneficial for infrastructure  and construction.
  • Sterling strength may weigh on overseas earners relative to more domestically focused companies.
  • The longer-term outlook will however remain dependent upon the implications of future trade arrangements.
 
 

UK equity mid / small cap

  • Reduced political risk will benefit sentiment and investment in domestic UK companies.
  • Benefit from potential sterling strength.
  • However, mid and small cap companies remain more exposed to the effects of Brexit, so the longer term outlook will be largely dictated by the implications of future trade arrangements.
 
 

UK gilts

  • Reduced political uncertainty and stronger investor sentiment would likely see yields rise from current levels.
  • Unlikely to see significant inflationary pressures that might force policy makers into more meaningful rate hikes.
  • Yield curve likely to remain relatively flat.
 
 

UK corporate bonds

  • Positive (although slowing) growth and a continuation of low funding costs should determine that default rates remain low.
  • Investment grade credit may continue to look attractive on a relative basis.
  • Spreads may tighten relative to euro and dollar investment grade credit.
 
 

UK inflation-linked gilts

  • We are unlikely to see significant inflationary pressures coming through, particularly if we see sterling marginally strengthen.
  • Monetary policy is unlikely to become more hawkish.

 

Labour majority

 
 
 

Impact on £

  • Weaker investor sentiment and withdrawal of international capital may see sterling initially sell off.
  • There may however be some cushioning from perception of a potentially softer Brexit outcome.
  • Net impact may however be an overall weaker currency.
 
 

UK equity large cap

  • Threat of nationalisation particularly within utilities and transport services.
  • Potential restructuring of corporate ownership.
  • Higher corporation taxes and increase in minimum wages likely to impact profit margins.
  • Potential weakness in sterling may benefit companies with large overseas earnings.
  • Planned fiscal spend may be beneficial for infrastructure / construction.
 
 

UK equity mid / small cap

  • Potential weakness in sterling may increase costs of imported goods and services, which when combined with a higher minimum wage and corporation taxes could impact profit margins.
  • Weaker investor sentiment and potential for capital flight could limit investment in domestic UK.
 
 

UK gilts

  • Planned increased fiscal spend and higher inflation shifts the probability towards higher rates over the medium term.
  • Potential for steeper yield curves and a higher risk premium impacting longer duration assets.
  • May increase the risk of a rating downgrade.
 
 

UK corporate bonds

  • Potential for higher interest rates would push funding costs up, which when combined with headwinds to earnings could see default rates rise.
  • Spreads likely to widen as corporate bonds underperform lower-risk gilts.
 
 

UK inflation-linked gilts

  • Potential sterling weakness will translate to higher inflation expectations in the short term, whilst over the medium term fiscal spend and wage increases should feed through to higher inflation.
  • Whilst higher interest rates will impact capital values, inflation-linked gilts should outperform nominal government debt.

 

Cazenove Capital and the Schroders Group do not hold political views.

Author

Investment Team

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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