A good rule of thumb for interpreting political announcements is to wait a few days for the real picture to emerge.

This is always the case with Budgets, where the nasty stuff tends to be hidden in the Red Book’s small print. Waiting for the weekend paper analysis is always more prudent than reacting on the day.

The count-to-ten advice has also held in recent elections and referendums. Remember how the market’s Brexit funk in June 2016 was quickly reversed as investors realised that a falling pound would boost the FTSE100’s exporters and overseas earners.

There was an even more dramatic reversal in the US market in November 2016 when investors quickly got over their shock at seeing Donald Trump in the White House to focus on what his deregulating, tax-cutting instincts might mean for corporate America.

I wonder whether the UK’s 2019 election might offer the flip-side of those two U-turns. The immediate response to Boris Johnson’s landslide was positive - first the FTSE 250 mid-caps, then the blue-chips themselves soared last Friday and on Monday. This morning it all feels a bit more uncertain.

So far on Tuesday, the FTSE 250 is 1.4% lower while the FTSE 100 is marginally in negative territory. The reason for the about turn is easy to identify. Last night the Government dramatically squashed any hopes that a big Conservative majority in parliament would free up the Prime Minister to tack back to the centre and negotiate a more market-friendly Brexit with closer alignment to EU rules and regulations.

In an extraordinary development, Mr Johnson has indicated that the Withdrawal Agreement that MPs will vote through parliament this week will explicitly rule out an extension to the Brexit implementation period that’s currently due to expire at the end of 2020.

That means that if the Government fails to negotiate an acceptable free trade deal in the 11 months from departure date at the end of January we will start to trade with Europe on unfavourable World Trade Organisation rules - the widely feared cliff-edge Brexit.

It’s not completely clear why the Prime Minister should want to tie his hands in this way other than to send a very clear message to those hoping that a new cuddly Boris would emerge after his stunning election win. The Prime Minister has clearly not lost his ability to surprise.

The scale of the retreat in the pound (down from $1.35 on Thursday night to under $1.32 today) shows how many observers have been wrong-footed by this development.

So, what should investors take from the latest change of direction?

The first conclusion is that, while the UK stock market is clearly oversold and undervalued, it could remain so for the next year or so while uncertainty persists. A meaningful narrowing of the valuation gap with other developed markets may not happen just yet.

The second is that Boris Johnson (advised by Dominic Cummings) has adopted the Donald Trump playbook. He sees tactical advantage in keeping his opponents in the dark about his next move.

That means, thirdly, that markets are likely to remain volatile next year, bouncing around as the headlines change. While it makes sense to have some exposure to the UK on valuation grounds, it would be wise not to overdo the home bias unless you have a very strong tolerance for the markets ups and downs.


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