Upturn in markets post-election likely to be ‘short-lived’

Following Thursday’s General Election result, which saw the Conservatives return to government after their best performance in three decades, the markets reacted broadly positively towards the news, with Sterling in particular, rallying strongly.

18 December 2019

With attention now turning towards Brexit and future trade negotiations, further periods of political and economic uncertainty are likely to render such upturns short-lived.

Charles Younes, Research Manager at FE Investments said:

"This election has confounded even the most optimistic Conservative party supporters. While a Tory majority was predicted, the scale of the of the victory is unprecedented.

“This is undoubtedly a good result for UK markets in the short run. Sterling has already rallied strongly, and we can expect to see an element of optimism hit UK domestic stocks (such as FTSE 250) with a degree of certainty now surrounding the future direction of Brexit. It was no surprise to see housebuilders, banks and the utilities sectors see strong returns in the immediate aftermath either.

“Nonetheless, this relief rally is likely to be short-lived. Political uncertainty will remain well into 2020, and investors’ eyes will increasingly turn to what progress the new government makes on securing international trade deals. Any stalling of negotiations, with the EU or other trading partners, could weaken sterling – a key transmission mechanism between UK politics and the UK financial markets. The currency moves will have once again an impact on the relationship between UK-domestic and international focused stocks.”

The realities of negotiating Brexit, along with securing other international trade deals is just one of several issues facing the new government, all of which could increase volatility in the markets. Given the fiscal direction of the new administration also remains unclear, questions remain over what decisions organisations like the Bank of England will take.

Charles Younes added:

“Most leading indicators for the UK economy are flashing amber or red, which would further add pressure on the BoE to cut interest rates. The Fed and the ECB are also expected to maintain their accommodative monetary policy, which should anchor yields at low levels across the world. So, while there have been short-term fluctuations, in the longer-term the yield on UK government bonds for instance are likely to remain stable, without any significant upturn. That said, should the UK be unable to negotiate trade deals, such stability could provide some degree of protection for investors. Either way, investors should continue to carefully re-evaluate the progression of the negotiations throughout the year and make any adjustments to their portfolios as is necessary. When facing periods of economic uncertainty, diversification becomes increasingly important; investors should take the necessary steps to diversify their investments appropriately.”