General Election Done And Dusted- A Stonking Majority For Conservatives Boost Investor Sentiment

  • Dec 17, 2019 GMT
  • Team Kalkine
General Election Done And Dusted- A Stonking Majority For Conservatives Boost Investor Sentiment

  • PM Johnson back to the Downing street with a thumping majority, Conservatives won 365 seats out of 650.
  • Mid-cap gauge FTSE 250 leapt more than 1,000 points or 5% after election result announcements.
  • GBP touched the highest level of 1.3515 against the greenback after May 2018.

Conservative returned to the British Parliament with a stonking majority. Boris Johnson-led Conservatives won 365 seats out of total 650 seats, up by 47 seats over the previous election mandate, Jeremy Corbyn-led Labour Party lost 59 seats to 203, Scottish National Party bagged 13 more seats over the previous mandate by winning 48 electorates, Liberal Democrats’ seats declined to 11, losing one seat this time, Democratic Unionist Party (DUP) the unionist political party in Northern Ireland won just 8 seats against 10 seats they had previously, and others stood at 15.

The snap election outcome, which was declared on December 13, 2019, has partially lowered the Brexit related uncertainties by providing a stable government in the UK. Before this festive season, election fogs hovering over Britain related to Labour party getting a majority at the House of Commons or a potential Hung Parliament had brought big swings in the UK financial market.

As, after the General Election announcement made by the then Prime Minister Mr Boris Johnson on October 28, 2019, till the date of voting as on December 12, 2019, the GBP witnessed large volatility and oscillated between 1.2768 to 1.3231 against the US Dollar, while equity benchmarks also recorded the similar kind of volatility. The FTSE 250, which gauge the medium-scale London Stock Exchange-listed companies and is more exposed to the domestic economy and currency depreciation risks, swung between 20,021.26 to 21,029.84, showing the volatility of around 1000 points.

The large swing in the UK’s domestic asset classes was driven by heightened uncertainties over the potential outcome of the General Election and pollsters fuelled the steep volatility through their opinion polls surveys.

UK general election is done and dusted

Amid a lot of political and economic uncertainties hovering over the British economy, general elections outcome seems to have soothed the nerves by handing the absolute mandate to the Boris Johnson-led Conservatives, who vowed to deliver Brexit by January 2020. However, a clear mandate for them reflects that the majority of UK citizens are favouring UK’s withdrawal from the EU bloc. Hence, there is no need of any second Brexit referendum, which was there in the Labour’s election manifesto.

A thumping majority would bring many uncertainties to an end, i.e. Brexit turmoil, economic deadlock, muted investment, jolted consumer sentiments and a recession like situation, chances of which were at the peak a couple of months ago. One thing is certainly off the table that there would not be any near-term chance that the UK would get dragged under a recession like situation in the wake of disorderly Brexit.

Conservatives’ majority of 365 at the House of Commons, would facilitate them to get Brexit done by the scheduled date of January 31, 2020. The divorce of the UK will be in accordance with the recent deal negotiated with the EU administrators, and PM Johnson’s vow to complete a comprehensive traded relationship with the EU counterparts by the end of December 2020.

Fogs of a no-deal Brexit, a second referendum and no-Brexit at all, have thrown out of the table post-election results, which in the past had brought a lot of volatility in the British economy and financial markets.

The Pound touched the highest level of 1.3515 against the US Dollar since May 2018

GBP has registered large swings post general election was declared on October 28 2019; however, Pound has touched the highest level of 1.3515 since May 2018 as on December 13, 2019, the day on which Boris Johnson-led Conservatives secured the biggest majority in more than 30 years, as traders bet that election result would break the intense political and economic deadlock oscillating over the British economy since more than three and half years.

The Pound jumped approximately 5% between October 28 to December 13, 2019, the sharpest rally since Brexit referendum took place in June 2016.

Daily Price Chart (from October 25 to December 17, 2019). Source: Thomson Reuters

In the above chart, it is clearly illustrated how GBP surged after general election announcement. However, it also shows the volatility it registered during the same period, as in the past couple of weeks GBP recorded a rally when pollsters were speculating Johnson's victory, while many a time the prospects of a Hung Parliament came into picture which further escalated political uncertainties had weighed on the British currency.

However, a clear mandate for Conservatives gave a breakthrough, and it attained a level, which was the highest level since May 2018.

Mid-cap gauge FTSE 250 registered a life-time high of 21,935.33 on the day results were out

The FTSE 250, a gauge of medium-scale LSE -listed companies which are more exposed to the domestic economy and Currency recorded a sharp rally in the past couple of weeks and registered a life-time high of 21,935.33 on the day election results were out, and Conservatives bagged the majority.

The massive upward movement in the mid-cap index was largely supported by appreciation in Pound Sterling. Also, it provided relief to many businesses from heightened fear of a no-deal Brexit or disorderly Brexit. It also opened the doors to restart the muted capital expenditure under the impression that demand would pick up in the next couple of quarters, that would lead to boosting their top-line and bottom-line as well.

Also, many businesses had high supply chain disruption risks, which can now be taken care of well post an absolute majority of the Conservatives’ recently.

Since the referendum took place in June 2016, domestic businesses were in more concerned as their majority of earnings comes from the UK and European markets, which was under a lot of pressure over future trade relationship with the EU bloc.

Also, PM Johnson now vows for a soft Brexit and had negotiated a Withdrawal deal with the EU bloc in October 2019, which went through the British Parliament successfully, and MPs from various political groups passed the deal at the House Of Commons, but they disagreed over the time-line, which invoked PM Johnson to go public for the third time and seek majority to get Brexit done.

However, PM Johnson has now vowed to negotiate a comprehensive trade deal with the EU counterpart by December 31, 2020, which has further raised concerns.

Election results cheered global investors

Global investors were closely monitoring the developments in the UK, and a stunning victory of PM Johnson-led Conservatives has reduced Brexit related uncertainties. Since Brexit referendum globally investors were boycotting their portfolio exposure in the LSE traded stocks as there were a lot of uncertainties and because of this, UK stocks have not participated in the past global stock market rally. At the current trading level, London Stock Exchange-traded stocks are at a substantially discounted valuation against their global counterparts, which has attracted many global portfolio investors to invest in the UK securities.

It is also perceived that 2020 would be the year for the UK stocks, carrying the potential to register big gains in next year. Especially, mid-caps are likely to be the biggest beneficiaries as their performance is largely due since Brexit referendum, and they are trading at a significant discount against their global peers.

What could drive LSE stocks in 2020?

Discounted Valuation:  The mid-cap index FTSE 250 is trading at a Price-to-Earnings multiple of 16.7x, whereas the S&P 500, a leading benchmark for the US stocks is trading at a Price-to-Earnings multiple of 23x, which reflects a valuation gap of approximately 30% between UK and US stocks. This valuation gap would attract the global investors towards the UK stocks, and now as the Brexit related disturbance has subsided to a large extent, this would likely lead to minimum downside risks in the UK securities.

High Dividend Yield: Together with discounted valuation, UK stocks are offering highest dividend within the developed markets, as the dividend yield of large-cap index FTSE 100 stood at 4.47%, whereas the Dow Jones Industrial Average Index’s dividend yield stood at 2.34%, which reflects FTSE 100 dividend yields is 1.9x of the Dow Jones Industrial Average index’s dividend yield and 2.6x of the Nasdaq Composite’s dividend yield.

Also, the FTSE 250 Index's dividend yield stands at 3.07%, which is approximately 1.3x of the S&P 500's dividend yield,  which indicates that investors could buy stocks which are available at a discounted valuation against their global counterpart and can also get high dividend income on their investment.

Also, the present government, which returned to the British Parliament with the absolute majority, would break the political and economic deadlock in the UK, which were dragging UK equities since the referendum.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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