Overview
Global implications
On the face of it, what looks like a good night for Boris Johnson could be painted as an historic event in the future of Europe and potentially for the United Kingdom. But does winning a strong majority for the Conservative Party (if exit polls are to be believed) mean much for global markets in 2020 and beyond? In my view, there are three areas that investors should focus on.
First, as the immediate rally in the pound suggests, this could be another signal that the long period of US dollar outperformance in the context of currency markets is coming to an end. Uncertainly over Brexit has led to a long period of sterling weakness in particular - but the US dollar has also been supported by America’s tighter stance towards monetary policy and stronger underlying economy relative to rest of the world. Weaker economic data over recent months and an uncertain political outlook has led to the Fed coming under pressure to keep monetary policy loose. This serves to support the economy but also the stock market, which appears to be seen by US President Donald Trump as a referendum on his performance as leader. The dollar also looks stretched to us from a valuation perspective. If we are indeed at a tipping point in the dollar’s long outperformance this will have meaningful consequences for global markets, and in particular emerging markets. While global markets have performed well in recent years led by strong US equity markets, emerging markets have been more volatile.
Second, it is likely that, Brexit aside, this Conservative victory in the UK will represent things coming full circle from David Cameron’s defeat of the Labour Party in 2010, when he largely ran on a campaign of austerity. By contrast, all parties in the current campaign cycle have talked about the need for more spending on areas such as healthcare. Johnson, in particular, has a track record of supporting investment in larger scale infrastructure projects. This aligns with a global trend we expect to continue in the coming months, one of government’s finding recourse in fiscal policy rather than monetary policy to support economic growth. Indeed, over the last week, we have seen the announcement of a meaningful new program of spending in Japan. While these campaigns are clearly focused on supporting domestic growth, it is important for investors to consider the cumulative impact of this global shift in economic strategy.
Third, both of the above points - and arguably the process of Brexit itself - could spell a change in the outlook for inflation. We have seen a number of inflation measures move higher over the past year, but when we look at bond markets across the world, it would be fair to say that a pick-up in inflation is being accorded a very low probability at current prices. Give the number of ‘false alarms’ over inflationary upticks in recent years, it is likely that central banks will position themselves behind the curve, which could, in sharp contrast to consensus, lead to inflation overshooting on the upside over the medium term.
At first glance, the outcome of a snap election in the UK should have little bearing for global markets. But considered in the context of what could prove to be more meaningful turning points in economic policy and market leadership, investors would do well to pay closer attention.
