WeeklyWatch – Election bluewash boosts stocks

16 December 2019

Stock Take

The political holy grail?

This year marks 101 years since the first women gained the vote and men over 21 gained universal suffrage. Prior to this Representation of the People Act, men could only qualify for the vote if they owned property. Ever since, the Tories have yearned for a Prime Minister who appeals to the working classes.

Is Boris Johnson the answer? His general-election gamble certainly paid off, with the Conservatives securing a majority of almost 80 seats, leaving Labour far behind. The Tories made significant inroads into Labour’s ‘red wall’ of seats across the Midlands and the North of England. Constituencies that hold Thatcher’s mine and factory closures at the forefront of their political outlook took a major step towards the Conservatives, with some seats actually turning blue: among them Bolsover, West Bromwich East, Burnley and Redcar – the latter for the first time in history!

Taking (electoral) stock

Various factors were blamed for Labour’s poor showing. Jeremy Corbyn blamed Brexit, saying it “has so polarised and divided debate in this country, it has overridden so much of the normal political debate.” He also confirmed he would not lead Labour into another general election.

Whatever the cause, both sterling and the major indices enjoyed a ‘Boris Bounce’ in Friday trading. The FTSE 100’s large weighting of foreign earnings usually push it in the opposite direction to the pound; their coordinated rise last Friday hinted at rising foreign inflows.

George Luckraft of AXA, Manager of the St. James’s Place Allshare Income fund, said:

“The decisive election result helps lift the cloud of uncertainty that has plagued UK businesses and the consumer. Sterling has spiked higher, extending its rally to around 10% since the early October lows, which is a headwind for overseas earners. Share price reactions have been the opposite of the initial post-Brexit vote period. Sectors such as the housebuilders [which fell in 2016] saw rises of 10% on Friday.”

Luckraft now expects the government to tack to the political centre, increasing spending on infrastructure via increased borrowing, although subdued inflation means he does not expect interest rates to rise soon. AXA forecasts that economic growth in the UK will accelerate to 1.2% in 2020. Luckraft said:

“The overall impact is that the UK is investable again, which should see sterling gaining support and equity markets narrow the Brexit-induced discount that currently prevails. In cases where ratings are low and business conditions improve sufficiently to drive upgrades, there is scope for strong returns.”

After the party

When the fanfare dies down, the PM faces significant challenges, most notably the challenge of managing Brexit. All the same, last week Donald Trump, delighted by the election result, expressed his confidence that a US-UK trade deal will soon be done.

John Betteridge of Rowan Dartington said:

“With a Conservative victory [already] priced in, the initial exuberance could be short-lived. On further reflection, markets might come to suspect that not a lot has changed. Months and probably years of hard negotiations with the EU would still be in prospect and the possibility of a hard Brexit has not been removed.”

Even last Friday, the initial post-election surge soon reached a ceiling and tapered off a little, both for sterling’s value against the dollar and for the FTSE 100. A key indicator of investor opinion in the coming weeks will be how the market performance of domestically oriented companies compares to UK-listed multinationals.

Ken Hsia of Investec, Manager of the St. James’s Place Continental European and Greater European Funds, said:

“While the result introduces the least uncertainty, the final Brexit terms and any trade deal with the EU remain to be established. While we expect a relief bounce in UK-centric companies that have de-rated to trade at a discount to the rest of Europe, we do not expect an immediate impact on incomes or corporate investment within the UK.”

Market lift

Amid the political fallout, equity indices clocked a strong performance and the MSCI World rose significantly over the period. Among the bright spots was the energy sector. Saudi Aramco saw its share price surge after its record-breaking IPO, raising $25.6 billion.

Elsewhere in the industry, Exxon Mobil was cleared of fraud the week after OPEC had agreed production cuts with Russia, which should help to buoy oil prices. The S&P 500, Shanghai Composite and EURO STOXX 50 all clocked gains over the five-day period, helped in no small part by supposed progress in US-China trade talks, with a phase-one trade deal reportedly being finalised.

Wealth Check

Trends come and go – a sentiment that is particularly evident in children’s toys. Indeed, last year’s ‘must have’ gift might now be languishing at the bottom of the toy box, as the next craze takes hold. Keeping up with trends is expensive – according to money.co.uk, parents look set to spend well over £100 on each child this Christmas, as Brits as a whole will splurge £33.3 billion on gifts.

However, while it may not be as exciting as unwrapping the latest gadget, a financial gift is likely to remain long after material gifts have been long forgotten – an investment is truly the gift that could keep on giving!

Thanks to the power of compounding returns, even a small amount gifted to a child when they are young has the potential to grow to a large sum by the time they are an adult, helping them pay for university or get a foot on the property ladder.

A financial gift is also a way to teach children about the value of money and the importance of saving and help them distinguish between needs and wants. Not that we’re suggesting stocks and shares will make an appearance on their letters to Santa…

And as if the reward of investing in their future wasn’t enough, the gift of investment is also better for the environment. With many plastic toys, packaging and wrapping paper ending up in landfill every year, putting money into a Junior ISA or child’s pension is one way to enjoy a guilt-free Christmas in the years to come.

In the Picture

How should investors respond to the election? Tom Beal, Deputy CIO at St. James’s Place, considers how investors have responded to the UK election result.

With the future of Brexit still uncertain and potential higher tax on the horizon, Tom reinforces the importance of retaining a long-term plan with a diversified portfolio, to prepare for any eventuality!

The Last Word

“Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.”

Paul Volcker, on meeting with major US banks in 2009 amid the financial crisis. Volcker, who was chair of the Federal Reserve from 1979 to 1987, died last week.

The information contained is correct as at the date of the article.

AXA, BlueBay and Investec are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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