Boris Johnson’s Conservatives last night secured their biggest election victory since 1987. For Labour, it was the worst performance since the election before that, in 1983, and its leader Jeremy Corbyn has conceded that he will not lead the party into another election. The Liberal Democrats were humiliated, as their leader, Jo Swinson, lost her seat to the Scottish National Party, which enjoyed a night to remember north of the border.
It is no exaggeration to say that the Tories’ unexpectedly easy win has reshaped the political landscape. It has significant positive implications for the now unblocked Brexit process. The SNP’s success, meanwhile, raises questions over the future shape of the UK. For investors, there will be major market consequences, which started, as ever, on the foreign exchanges. The pound soared overnight to its highest level since May 2018.
As the Conservatives hoped, this turned out to be an election dominated by Brexit. The Prime Minister’s ‘Get Brexit Done’ mantra cut through in parts of the country that voted to Leave in 2016, notably the so-called red-wall of traditional Labour seats across the North. Labour’s indecision about Brexit added to suspicion about both its leader’s personal qualities and the party’s radical manifesto. Voters turned away from the party in its traditional heartlands.
The election marks a turning point for both major parties. The Conservatives will now need to calibrate their policies to a more working class, northern and Leave-inclined support-base. Labour needs to rethink its whole approach in the same way that New Labour transformed the party in the 1990s under Tony Blair and Gordon Brown. The scale of the Conservative win, and Labour’s internal divisions, may take the right-wing shift well beyond even the next scheduled election in 2024.
The most important consequence of the big Conservative majority is the freedom it gives Boris Johnson to drive through Britain’s departure from the EU. The withdrawal agreement will come back to Parliament before Christmas in order that Britain can hit the end-January Brexit deadline. No deal at that point is now effectively off the table, although it cannot yet be discounted at the end of 2020 given the Prime Minister’s insistence that he will not request any further extension to the departure process.
The pound reacted so positively to the expected big Conservative majority because it raises the chances of a closer alignment with Europe in the long run. Unworried by the Brexiteer wing of his party, Mr Johnson has more freedom to conduct the forthcoming trade negotiations as he chooses. It is not clear yet whether freedom from the Brexiteer wing of the party will see the PM pursue a hard Brexit or tack back to the centre ground and greater alignment with the EU. Either way, he at least now has control over his approach.
The market reaction
The pound rose by more than 2% to an 18-month high of $1.35 and broke through the €1.20 mark as the currency acted as the traditional early barometer of market sentiment.
Overnight, stock markets rose sharply in Asia, as news of the likely Conservative victory added to yesterday’s positive trade news after President Trump said the US and China were close to signing an agreement before the scheduled imposition of new tariffs on Sunday.
Investor sentiment is being driven as much by relief that Labour’s hard-left agenda of nationalisation, increased taxation and higher government spending is off the radar. Sectors most exposed to its plans, such as utilities, are likely to fare best in any initial rally. Domestic stocks are expected to do better than the FTSE 100’s international-facing shares, which could be held back by a stronger pound which will make exports less competitive and reduce the value of overseas earnings.
Government bonds are predicted to take a hit as a more optimistic economic outlook starts to be reflected in higher yields, which move in the opposite direction to prices.
Looking beyond the initial market response, there remain question marks over the sustainability of any rally given the ongoing uncertainties in the Brexit negotiations. Goldman Sachs forecasts another year of subdued growth but looks for an acceleration through 2021 and 2022.
Other factors for investors to consider include the likely pressure on the new Government to increase spending in order to deliver on campaign promises. This could stimulate economic activity and encourage more business investment, but it could also increase borrowing and it is not clear how the market will weigh up those conflicting forces.
Overseas investors, who have long shunned the UK, will see the disappearance of the risk of a Labour Government as a positive, offering the prospect of a re-rating of Britain’s out-of-favour equity market.
Richard Buxton, head of UK equities at Merian who recently contributed to our 2020 Foresight outlook video, said ‘from an investor’s perspective, today’s clear majority for the Conservative Party is a welcome result.’
The impact on your finances
Most savers and investors are likely to agree that a Conservative majority is the best of the available outcomes for their personal finances. The Government’s campaign promises included a vow not to increase individual taxes in contrast to Labour’s threat to raise the higher and additional rates of income tax to 45% and 50% respectively, kicking in at much lower earnings thresholds of £80,000 and £125,000.
Investors with uncrystallised capital gains will also breathe a sigh of relief as Labour’s manifesto included a promise to align CGT with income tax. A high-earner’s capital gains would have been taxed at 50% rather than the current rate of just 20%. The Conservatives’ proposed increase in the inheritance tax allowance stood to be scrapped by an incoming Labour government. That remains intact, as does the Married Allowance.
More on the election
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