Brexit

UK election 2019: countdown to 12 December

The reduced risk of a no-deal Brexit scenario has caused the pound to rise in October – but fresh election uncertainty continues to hold back UK assets and sterling

31/10/2019

Investment Team

Sterling and UK stocks stuck in holding pattern as uncertainty prevails ahead of election

Sterling rallied close to 5% against the US dollar in October as conviction strengthened that a “no-deal” Brexit at the end of the month would be avoided. However, both sterling and UK stocks are little changed following confirmation of a General Election on 12 December. 

This is because while the risk of a no-deal may have diminished, electoral uncertainty means that a wide range of Brexit outcomes are still possible.

Over the longer term, as shown in the graph, below, the pound has largely remained within the $1.20-$1.40 range since its initial fall following the referendum in 2016. The FTSE, which comprises many companies with dollar earnings, has tended to rise in periods of pound weakness.

Election result set to be characterised by fine margins

Recent polls suggest the Conservatives have a healthy lead over Labour. However, there is a degree of scepticism around polling heading into this election given the large number of undecided voters – and the poor track record of polls ahead of recent UK elections. The Conservatives stand to lose seats in Scotland to the SNP and to the Liberal Democrats in England.

There is also the threat posed by the Brexit Party led by Nigel Farage. “It wants Brexit to happen as soon as possible, and without a deal," says Azad Zangana, Senior European Economist and Strategist at Schroders. "This version of Brexit could attract enough voters to split the support for Brexit and ultimately allow the Labour party to make gains.” 

Danger remains of no clear Brexit outcome after the election

If the Conservatives win a majority, as currently predicted by polls, they should be able to push their latest version of the Brexit deal through the legislative procedure with little resistance. However, other results – such as a hung parliament – could intensify uncertainty over the course of Brexit. One potential outcome is a coalition of Labour, SNP and Liberal Democrats forming in support of a second referendum, including an option to remain within the EU, and potentially another general election after that. 

An orderly Brexit would reduce risk

“For the economy, a smooth Brexit with a transition period removes a great deal of downside risk for the UK economy,” says Zangana. “We would expect business investment to rebound with the reduction in uncertainty, while households could also increase spending.

“The build-up of inventories will have to be worked through, which will be a drag on growth, but this would be complete by the end of 2020. Overall, we could see a gradual acceleration in GDP growth and confidence.”

Brexit and our portfolio positioning

We recently increased our exposure to UK stocks using a low-cost index tracker. This does not represent a change to our long-term, “strategic” allocation to UK equities, which has been declining in recent years. However, we recognize that Brexit uncertainty has left sterling and many UK stocks looking cheap compared to global peers. Their underperformance could quickly reverse if it becomes clear that we will get an orderly Brexit with a transition period. Even so, our exposure to UK equities remains modest and we do not expect Brexit to have a significant impact on portfolios overall.

Author

Investment Team

 

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