The result of the UK general election was delivered on the morning of Friday 13th December, bringing a majority for the Conservative party and ensuring the continued tenure of Boris Johnson as Prime Minister.
While it is still early days, the next steps are likely to include the UK’s withdrawal from the European Union in January on the revised terms that were agreed in October. This will then ‘start the clock’ on the 11-month negotiation period, where the UK and the EU will work toward agreeing a trade deal.
As expected, stock markets have rallied on the news, which reduces uncertainty about the future. The removal of the threat of nationalisation of some services and potentially elevated taxes has also brought more optimism to markets, which were fearful of a Labour-led government.
The value of sterling has also risen sharply on the result, and this is likely to impact both UK and foreign assets within our portfolios. One of the impacts of this strength in the Pound is a reduction in the value of UK companies who receive income in foreign currencies. This is in contrast to the 2016 EU Referendum results, which saw the reverse when the value of foreign currency increased as the Pound weakened. As a result of this, companies that do most of their trading in the UK (and therefore receive most of their earnings in Pounds sterling), may perform better relative to their peers with more international exposure due to the devaluation of those foreign currencies.
We have seen UK government bonds weaken following the election result, which investors see as positive, and who therefore view assets that provide protection as being less important in light of the reduced uncertainty.
Aside from the currency issue, the actual equities affected by the election result represent a relatively small part of our portfolios. The movements of our assets outside of the UK (and unaffected by the value of sterling) are a much more significant contributor to portfolio performance, especially over the longer-term and this remains our focus.
We positioned our portfolios with lower than average levels of risk in the key areas affecting the UK in the direct aftermath of the election results. The portfolios have therefore not seen significant falls, and have seen some mild growth as a result of the strength of sterling. We will keep our defensive positioning as long as there is uncertainty around the UK’s future trading relationship with the EU.
Tom Sparke, GDIM Investment Manager