The Conservatives secured a comprehensive parliamentary majority, winning a House of Commons majority of 80 seats – their biggest since 1987. With all seats declared, the Conservatives won 365 seats, up 47 on the previous result and its biggest opposition, Labour, has 203 seats down by 59. Following Labour’s disappointing defeat in the General Election, its worst since 1935, Jeremy Corbyn announced his resignation as Party leader, opening up a race for leadership for the left-wing party. Liberal Democrats also faced a similar fate as Jo Swinson lost her seat to the Scottish National Party, and the dismal performance led to a tally of 21 MPs shrinking down to 11, highlighting this as the Lib Dem’s second-worst performance in its 31-year history.
The Conservatives initial manifesto proposed a very limited package, however additional pledges were made during the campaign which may lead to a looser fiscal stance than originally anticipated. With a Budget due in early 2020, the government may discover a greater appetite for fiscal largesse following years of austerity. Given the magnitude of the Tory win was largely due to securing once Labour-held seats in Northern England, Midlands and Wales, extra public spending in less prosperous parts of the country will ensure Conservatives remain supported by the majority and maintain the trust of traditional Labour voters.
The Prime Minister pledged fiscal stimulus will equate to 1% of GDP, with a promise to boost spending by up to £20 billion annually on infrastructure. Spending in this area will increase the productivity potential, with possible wage increases and an improved job market generating higher tax revenues, which will fund infrastructure projects over the medium-long term. Nonetheless, in the short-term Johnson is faced with the issue of fiscal constraints and low growth related to Brexit and global trade frictions, therefore it will be interesting to see how this unfolds in the current economic environment.
Brexit Woes Set to Continue?
The majority win clears the way for the new administration to bring forward legislation to ratify the Brexit deal and may be as soon as this week. The changes in parliament should allow for legalisation to pass relatively smoothly ahead of the 31st January 2020 deadline. However, although the UK economy avoided the brunt of a Labour government, Brexit related uncertainty is set to continue to weigh in on investor sentiment throughout 2020, until further clarity is provided on the Brexit deal.
Boris Johnson reiterated a Brexit withdrawal agreement would be reached by January 31st, however, a trade deal is unlikely to be completed by the end of 2020. It is expected that Prime Minister Johnson will eventually have to extend the transitional period to avoid a hard Brexit Scenario and ramifications of tariffs. The greater uncertainty is over negotiations on the future relationship and whether the UK can accept much tighter restrictions on access to the EU market which may deem more complicated. Any deal also requires a unanimous agreement between the remaining 27 EU members which may also push the transition period over December 2020 into 2021, therefore pushing the cloud of Brexit-related uncertainty further on. Although, the road to a deal will be a bumpy and tedious one, ratifying the Withdrawal Agreement will eliminate the possibility of the UK exiting the EU in January with a no-deal and could prompt investment spending for individuals in the near term.
What’s Next for the UK Markets?
Markets reacted well to the Conservative victory as the FTSE 100 railed approx. 3.5% over the past two trading days and the FTSE 250 Index which tracks medium-sized companies with more domestic exposure gained approx. 5% since Friday. With investors now more bullish on the domestic UK stock market, we may see an uptick in UK equities, however, investors remain cautiously optimistic as Brexit uncertainty continues to play a prominent role in investor sentiment. Clarity on the UK’s terms of exit from the EU should unlock pent-up business investment and provide a boost to domestic demand. With conservative government manifesto historically aiding growth in UK domestic firms with the reduction of corporation tax from 28% to 19%. These firms should continue to take advantage of the manifesto pledges made by the conservatives with further growth potential for relatively undervalued UK stocks. Furthermore, geopolitical risks have left UK assets significantly undervalued versus its peers, however with pressures alleviated we may see unloved UK assets rallying heading into 2020. UK equities have underperformed this year and are arguably relatively cheap from a valuation perspective, but further gains will also involve removing or at least reducing much of the uncertainty that has kept UK businesses from investing over recent months.
Although political jitters are posing fewer risks, the UK economy still faces downside risks as the IHS Markit UK Manufacturing PMI dropped to a four-month low of 47.4 deeper into contractionary territory amid weaker export sales and delays to spending decisions ahead of the general election. Inflation also remains subdued as the CPI held steady at 1.5% year-on-year in November. As a result, it may take time for the positives of a Conservative government to feed through into the UK economy and improve consumer and business sentiment.
Sterling climbed sharply to $1.351, its highest level since June 2018 from $1.317 immediately after the exit poll for the election was announced. Similarly, the sterling made gains against the Euro increasing to €1.207, its highest level since December 2016, as market sentiment improved with the expectation that the UK will be heading into a period of political stability. The short-term uptick in sterling will also induce domestic investment, economic prosperity and overseas interest in sterling-denominated assets. However, sterling volatility may present itself in H1 2020 in the instance the Conservatives fail to seek an extension on its 12-month transition period. As a result, we remain cautious until further clarity is provided on the Brexit deal outcome. As it stands, further gains will be harder to achieve given the challenges ahead and potential political headwinds and will continue to monitor economic data given current volatile market conditions.
Moving from Markets to other aspects of domestic finances, other areas of interest following the election result can be defined as follows:
The Conservatives manifesto, published on November 24, was criticised by the pensions industry for its lack of detail on how it plans to fix the social care funding crisis.
Boris Johnson had promised in his first speech as prime minister that he would “fix the crisis in social care once and for all” but so far nothing concrete has materialised.
The Conservatives manifesto only stated “nobody needing care should be forced to sell their home to pay for it,” with no detail on how the party plans to address the funding issue.
The party promised to tackle pension tax at both ends in its manifesto, targeting tax relief affecting both low-paid and high-paid workers.
Promises were made to fix a tax relief anomaly which means the lowest-earning workers, the vast majority of whom are women, can miss out on £8,000 in pension savings over the course of their working life.
The Conservatives also pledged to fix the tapered annual allowance which is affecting doctors’ pensions but stopped short of promising to scrap the taper altogether.
We can expect fast action on this, with the party having promised to hold an urgent review to solve the “taper problem” within the first 30 days of winning the election.
The Conservative party wants to raise the national insurance threshold to £9,500 next year from £8,632, with a future aspiration to moving the threshold to £12,500.
Commentators noted by shifting national insurance rates, rather than income tax thresholds, the party “extended the giveaway to the lowest earners”.
The Conservatives pledged no increases to income tax, National Insurance, and VAT under their triple tax lock.