The UK will have a government with a strong majority for the first time in 14 years – and a Conservative government with a meaningful majority for the first time in over 30 years. This should allow Prime Minister Boris Johnson to begin executing on his manifesto promises with the support of the House of Commons and no meaningful opposition in place.
We would expect the European Union (EU) Withdrawal Bill to be passed in the next few days/weeks and UK to leave the EU by the end of January 2020, after 47 years of membership. This will be followed by a transitory period of grace in which Johnson’s government will face its first major challenge – to agree on a satisfactory trade deal with the EU by the end of 2020. What is unclear is just how having a large majority and a body of Conservative MPs who have explicitly signed up to “Get Brexit Done” will change the probabilities of a trade deal with the EU, or a “hard” exit on World Trade Organisation (WTO) terms. We saw relatively modest early movements in sterling in response to the election result. This was in part due to the fact that the result had been discounted ahead of the election, with Johnson an odds-on favourite to win with a majority, but also the lack of clarity around the shape or terms of any agreement the UK might have with the EU by the end of next year.
A stint in the back seat for Brexit
In the short term though, Brexit headlines should take a welcome back seat once the EU Withdrawal Bill is passed and the UK formally leaves the EU. A budget is planned for February/March where the government will be expected to flesh out the fiscally expansive policies outlined in its manifesto; so the nature or scale of any stimulative domestic policy could become more of a focus for markets.
UK domestic shares rallied this morning, which suited our portfolio positioning (more than 5 per cent net long to UK domestics coming into the election). But the muted reaction in sterling actually means less of a currency translational headwind for any long position in a UK-listed company with overseas earnings (especially in US dollars). We have spent time analysing the technical impact of the outflows from both UK and European equity markets over the past three years and are monitoring closely for evidence of any reversal in these (very) significant flows, which could drive further outperformance.
Trading the ceasefire
Our trading activity has been slightly more restrained than compared to other elections or referendums in recent years as positioning had already been adjusted over the past few weeks and months to benefit from the likelihood of a Conservative win. We used the post-election relief rally “ceasefire” as an opportunity to book profits on a number of long holdings, and initiate shorts where we have identified operational trading risks that we believe outweigh the benefits of reducing political risk. Elsewhere, we have added to core longs in those stocks that we expect to benefit from the budget early next year – such as UK housebuilders and financials. Encouragingly, stock dispersion levels have remained high within industry and sector groups, generating increasing opportunities to take tactical positions on both the long and short books.
Luke Newman, portfolio manager, Janus Henderson
