What does the election result mean for investments? 20 Dec 2019
Stock markets are generally information efficient and very quickly factor in expected changes in domestic policy. Market euphoria followed last night’s election result with the fog of Brexit eventually clearing.
Following last night’s emphatic result, giving the Conservative Party an 80 seat majority, UK domestic stocks rallied hard from the opening bell. Utility companies and UK House Builders surged with the likes of Taylor Wimpey, Berkeley Homes and Persimmon all up over 10%. United Utilities and National Grid are both up 8% and 6% respectively.
The situation is the same for many UK focused companies. It is now viewed that the environment these companies operate in will be more business friendly. The size of the majority gives the Conservatives a clear mandate to pass decisive (and business friendly) legislation.
The FTSE 250, the index which reflects the prices of the mid 250 companies in the UK, has made a new high today reflecting optimism in the future prospects of these companies.
Looking back further, the environment for UK shares has not been very favourable for some time. There have been many new regulations over the last twenty years. I would view the election result as very friendly for share prices.
The scale of the win for the Conservative Party means they will be able to push through most legislation that they choose. If the majority were smaller, then the policies and laws they could get through parliament would be limited. Now, however, they are much more likely to put through a more wide-ranging legislative programme.
Aside from lower taxes and lighter regulation, the international effect is likely to be significant. Investment funds will view the result in that they can invest for five years will a high degree of assurance. This is likely to unleash a wave of investment, especially as the pound is quite low. We could see the pound head back towards 1.50 with the USD and beyond, which is where it was before the Brexit vote.
I suspect economic policy generally will be loose for some time. That is to say, interest rates will be kept low, while taxes are cut and there is targeted spend on infrastructure which will have a ‘trickle down’ effect on the economy.
This explains why domestic focused companies such as house builders and utilities are up today. The stability will be welcomed by business and international investors and the effect could last for some time.
Managing Director & Investment Manager
Capital Financial Markets Ltd