Sterling and equities bask in the afterglow of some political certainty
16 December 2019
After years of political and economic uncertainty a relative sense of calm - and renewed optimism - is almost tangible in the UK, after last week’s decisive general election outcome.
With it also comes the prospect of an end (of sorts) to the interminable Brexit mess that has hung heavily over the UK economy and political landscape for the past three and a half years, and there’s some relief in the markets. All the main UK stock market indices are up and the pound has regained lost ground.
And it’s not just in the UK. The prospect of an end in sight to the trade war between the US and China is positive progress after months and months of rising political tension between the two.
It is probably best-described as an interim phase one agreement - but just like the Brexit deal Prime Minister Boris Johnson is now racing against the clock to get across the line by his promised date of 31 January - it’s at least the beginning of the end. At least for the optimists among us.
Since the Conservative win the pound has risen. It rose as high as $1.3422 in early London trading this morning, ahead nearly 0.75% again from where it closed last week. It had soared to a peak of $1.3514 after it became clear on Thursday that Boris Johnson’s Tories would command a strong majority in the House of Commons. And that spelled good news for equity markets too, with analysts saying out of favour UK stocks could now start to look more Cinderella and less ugly sister than they have done for some time.
The internationally-diverse FTSE 100 index rallied 2.3% in mid-morning trade — the biggest gain since April 2018 — bringing its rise for the past two trading days to 3.5% and making it its biggest gain since April 2018.
Meanwhile, the FTSE 250, which tracks medium-sized British firms that tend to be more exposed to the domestic economy, and is, as such, a better indicator of the UK economy, added another 1% after its 3.4% surge on Friday.
The UK economy certainly needs some good news. Last week the latest figures showed that the economy had suffered its worst three months for more than a decade as output failed to grow once again in October.
If you’re an optimist, then the economy flatlined month-on-month in October, after two months of declines, but it was the weakest three months since early 2009.
But, if political and economic uncertainties ease then 2020 could be a different story.
However, as political hounds know, the Brexit deadline is not the end of the story but in fact just the beginning. The strength or weakness of the pound, always an early indicator of the political climate, bounced on hopes of some Brexit clarity, but its performance in the longer term will be dictated by the trading relationship that is ultimately forged with the EU - and indeed other potential partners; not least the United States.
Prior to the general election last week, we spoke to three fund managers to get their views on the outlook for 2020. Of course, when it was recorded the Conservative majority was not known, but in light of that it makes for even more interesting viewing.
You can hear what Rathbone’s James Thomson, Merian’s Richard Buxton and Fidelity’s Ayesha Akbar had to say in our MoneyTalk 2020 Foresight interview, hosted by Tom Stevenson below.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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