It is 101 years since the Representation of the People Act delivered universal suffrage for all UK men aged 21 or more – and for a much larger number of women over the age of 30. Prior to 1918, men could only qualify for the vote if they owned property. Ever since, the Tories have always hoped to find that electoral holy grail: a Conservative candidate for prime minister who appeals to the working classes.
Have they found one in Boris Johnson? Last week’s election was remarkable less for his party’s overall share of the national vote, which only rose 1% from the 2017 election, as for the inroads the Tories made into Labour’s ‘red wall’ of seats across the North of England and the Midlands. Constituencies whose politics were baked in Thatcher’s mine and factory closures took a major step towards the Conservatives. Some saw majorities whittled down from the thousands to the hundreds. Others actually turned blue; among them Bolsover, West Bromwich East, Burnley (which hadn’t gone Tory in 100 years) and Redcar, (which never had).
“It seems like Labour has managed to make itself the party of the few, not the many,” said BlueBay’s David Riley.
Large spending plans, Corbyn’s personal brand and mixed messages on Brexit were all variously blamed for Labour’s poor showing. Whatever the cause, both sterling and the major indices enjoyed a Boris bounce in Friday trading. The FTSE 100’s large weighting of foreign earnings usually push it in the opposite direction to the pound;; their coordinated rise last Friday hinted at rising foreign inflows.
“The decisive election result helps lift the cloud of uncertainty that has plagued UK businesses and the consumer,” said George Luckraft of AXA, manager of the St. James’s Place Allshare Income fund. “Sterling has spiked higher, extending its rally to around 10% since the early October lows, which is a headwind for overseas earners. Share price reactions have been the opposite of the initial post-Brexit vote period. Sectors such as the housebuilders [which fell in 2016] saw rises of 10% on Friday.”
Luckraft now expects the government to tack to the political centre, increasing spending on infrastructure via increased borrowing, although subdued inflation means he does not expect interest rates to rise soon. AXA forecasts that economic growth in the UK will accelerate to 1.2% in 2020.
“The overall impact is that the UK is investable again, which should see sterling gaining support and equity markets narrow the Brexit-induced discount that currently prevails,” said Luckraft. “In cases where ratings are low and business conditions improve sufficiently to drive upgrades, there is scope for strong returns.”
Elections are one thing: governing quite another. When the fanfare dies down, the prime minister faces significant challenges, among them the resurgent SNP’s independence push, and the challenge of managing Brexit, which will be less an overnight departure than a multi-year process of detailed and complex renegotiations with existing trade partners. All the same, last week Donald Trump, delighted by the election result, expressed his confidence that a US-UK trade deal will soon be done.
“With a Conservative victory [already] priced in, the initial exuberance could be short-lived,” said John Betteridge of Rowan Dartington. “On further reflection, markets might come to suspect that not a lot has changed. Months and probably years of hard negotiations with the EU would still be in prospect and the possibility of a hard Brexit has not been removed.”
Even last Friday, the initial post-election bounce soon reached a ceiling and tapered off a little, both for sterling’s value against the dollar and for the FTSE 100. A key bellwether of investor opinion in the coming weeks will be how the market performance of domestically-oriented companies compares to UK-listed multinationals.
“While the result introduces the least uncertainty, the final Brexit terms and any trade deal with the EU remain to be established,” said Ken Hsia of Investec, manager of the St. James’s Place Continental European and Greater European funds. “While we expect a relief bounce in UK-centric companies that have de-rated to trade at a discount to the rest of Europe, we do not expect an immediate impact on incomes or corporate investment within the UK.”
Amid the political ruckus, equity indices put in a strong performance and the MSCI World rose significantly over the period. Among the bright spots was the energy sector. Saudi Aramco saw its share price surge after its record-breaking IPO; the company raised $25.6 billion. Elsewhere in the industry, Exxon Mobil was cleared of fraud the week after OPEC had agreed production cuts with Russia, which should help to buoy oil prices. The S&P 500, Shanghai Composite and EURO STOXX 50 all clocked gains over the five-day period, helped in no small part by supposed progress in US-China trade talks.
AXA, BlueBay and Investec are fund managers for St. James’s Place.
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