Overview
Pound jumps on Conservative landslide
The pound had risen in the run up to the election, but markets were surprised by the size of the Conservative majority and sterling shot up on the 10pm exit poll on Thursday. The more domestically focused mid-cap FTSE 250 rose to an all-time high in intra-day trading. Gilts fell modestly, pushing yields on the 10-year higher to around 0.86 per cent.
Government can begin to spend
Now that Prime Minister Boris Johnson can get his EU Withdrawal Bill through Parliament, attention will turn to the future relationship between Britain and the EU. While this will dominate headlines in the coming months, the government can start executing on its promised spending plans. Areas such as outsourcing companies and construction should benefit. We should also see business confidence return to the domestically-oriented private sector, unlocking previously delayed investment. Similarly, UK consumers who had put off purchasing big ticket items, such as houses and cars, may feel confident enough to go ahead.
UK remains cheap
For global investors, the UK remains a cheap investment destination. It is generally under-owned by international investors so there is scope for sterling assets to rally further amid increased short-term certainty around Brexit. This should also benefit occupier demand for real estate. More broadly, investors will be watching whether the UK will participate in the global macro tailwinds of synchronised monetary easing.
Bank of England could cut rates
A stronger pound should dampen inflation but the implications for interest rates are not clear cut. Growth remains weak and the prospect of fiscal stimulus may only have a limited effect on the economy. We expect the Bank of England will remain cautious, leaving open the possibility of a rate cut in 2020. More broadly, late-cycle dynamics and unresolved geopolitical risks keep us cautious on risk assets, with a preference for defensive companies with stable cash-flows.
