BNY Mellon: Commentary on UK elections

BNY Mellon: Commentary on UK elections

Politiek Verenigd Koninkrijk
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Shamik Dhar, chief economist at BNY Mellon Investment Management comments:

“Today’s outcome offers a more definitive route to Brexit and offers the clarity that businesses and markets have been craving for the last 3 years. It is now more likely that we will leave the EU at the end of January and whatever deal we end up with is likely to be at the harder end of the Brexit outcome, like a free trade deal or similar. Coupled with an upturn in the world economy, we could see quite a strong bounce in the UK economy and the FTSE 100.  

That’s not to say there aren’t pitfalls ahead. Despite a Conservative majority there will still be debate as to what kind of future relationship the UK should have with the EU. If we do leave on January 31, it’s pretty likely that attention will turn to what kind of trade deal we agree over the next few months. I believe it’s likely the UK and EU will negotiate a deal closer to the EU & Canada deal and that the UK will come out of the customs union. However, without the playing field restrictions under the single market rules, trade with the UK will be quite attractive to a number of countries, like US, Australia and Japan. The focus will pretty quickly shift from negotiating a deal with the EU to third countries and other organisations.

“In the short-term, there will be some damage to the economy as a result of Brexit; however, whether the damage is long-lasting remains to be seen. Investment was undoubtedly been weak in 2019 due to uncertainty and fear about what Brexit could deliver, so a stable majority government driving forward Brexit will release some pent up investor demand. Regardless, I am sceptical about the longer term negative impact of Brexit and believe that many of the more negative estimates depend on Brexit being a substantial hit to productivity growth, which is determined by a range of factors.

It may well be that as long as we get certainty and a “clean” deal, then UK businesses can return to focusing on generating productivity in the longer term. Developments in technology mean that we might be on the cusp of a productivity upturn and, to an extent that is largely independent of the Brexit outcome.”

Emma Mogford UK equities portfolio manager at Newton Investment Management comments:

“A Conservative majority gives us more certainty for the UK’s outlook. This could be positive over the short-term for domestic businesses and for economically sensitive sectors of the market, such as banks and house builders.  While sterling and UK domestic company valuations have risen since August, the starting point is still one of low valuations of the UK market with some of the domestic companies trading at levels that are discounted.

However, in the longer term, the UK will still need to negotiate an EU trade deal and this means that uncertainty will continue to rumble on and in turn will affect UK companies in the short term. Past the end of January, as we get onto negotiating with the EU, sterling will likely be volatile until it is clear what the second phase of Brexit looks like. A Conservative majority also takes away some of the uncertainty surrounding sectors that were at risk of nationalisation under a Labour government such as water companies and broadband, and we’ll likely see some of that discount come out of the market.”

Howard Cunningham, fixed income portfolio manager at Newton Investment Management comments:

“A decisive election result means we can move on from politics to policy. The size of the majority also gives the PM breathing space to decide on the shape of the UK’s future trading relationship with the EU and the rest of the world. There is a clear mandate to leave the EU, but with a comfortable majority Boris Johnson is not necessarily beholden to the ERG.

With a Conservative majority, per its manifesto, current spending and tax revenues will each be about £3bn higher than previous budget forecasts.  For gilts and sterling this means little change.

A rally in equities and sterling is understandable given the removal of uncertainty. We might see a slight softening in the gilt market for the same reason. However, a conservative majority had already been priced in to the market so we don’t expect to see a large change in the short term.

2020 may be a different story, as the difficult negotiations on the future trading relationship with the EU begin. Until that is clear, business investment will likely remain on hold, and the next Budget is unlikely to bring significant fiscal stimulus.

“The problem with the Conservative’s approach is that by ruling out any increases in the three main personal taxes, they have closed off one financing avenue if greater public spending is needed, such as for the NHS, or if pursuit of a clean break with the EU at the end of 2020 leads to further economic weakness. Extra borrowing would therefore be required to plug the gap, with the majority of it financed by additional gilt issuance.”