The FTSE 250 has surged over 5% as markets wake up to a Conservatives landslide and sterling hits $1.35 – its highest level since May 2018 although investors have warned significant hurdles lie ahead for prime minister Boris Johnson in terms of Brexit negotiations and strengthening support for Scottish independence.
The Conservatives won 364 seats while Labour had just 202 and the remaining parties 83.
It is the biggest gains for the UK mid-cap index since 2010, while the international currency exposure of the FTSE 100 meant that it opened up at 0.8%.
Willis Owen head of personal investing Adrian Lowcock thought Johnson’s win could trigger the start of the “Santa Rally” in the UK, pointing out positive news surrounding the US/China trade deal overnight should also support equities.
Brewin Dolphin head of research Guy Foster expected a gradual acceleration in GDP growth and confidence, but warned this was just the beginning on the Brexit process.
“Even with the passing of the withdrawal agreement, the UK could still leave the EU without a deal at the end of 2020 if trade negotiations don’t proceed successfully,” Foster said.
UK small-cap companies set to re-rate
Merian Global Investors head of UK small and mid caps Dan Nickols expected the Conservatives’ win at the election would be a catalyst for the Numis UK Smaller Companies Index (excluding Investment Trusts) to re-rate upwards from its current forward price/earnings of 12.1x.
This is cheap in historic terms, and the election result could be the catalyst for a rerating upwards. It could also prompt an uptick in IPOs, which stand at just 19 this year, as issuers look to take advantage of improved sentiment and demand for UK equities, Nickols said.
But there are hurdles ahead.
“If the market reaction in the wake of the Conservative win is overdone, it could fade once the nitty-gritty realities of getting a Brexit trade deal done become more apparent,” he said. A stalling in negotiations with either the EU or other trading partners would weaken sterling.
Johnson’s withdrawal agreement is set to take the UK out of the EU on 31 January leaving 11 months for the Conservative leader to negotiate a trade deal with the 27 member states.
If he wishes to break with his promises and extend the transition deadline, he will have to do so in summer, notes Franklin Templeton head of European fixed income David Zahn. “There are a lot of likely sticking points in the discussions, with fishing rights being potentially tricky to resolve.” If there are no signs of early breakthroughs in negotiations, markets will start worrying again about a no deal exit from the trading bloc.
Nickols added the scale of the SNP’s victory in Scotland may make pressure for an independence referendum “irresistible” but the size of the Conservatives’s majority would make it easier for Johnson to navigate these challenges.
The Scottish Nationalist Party won 48 seats out of a possible 55.
Conservatives’ win welcome news for European equities
Liontrust European equity manager Olly Russ said the result could bring international investors back to the region. “International investors have perhaps been put off by the negative headlines and sense of crisis engulfing broader Europe including the UK.”
Russ said the result would be welcomed by EU member states “due to an end to the interminable last-minute emergency summits and, from a French perspective at least, the opportunity to reshape the EU into a deeper and more centralised union”.
Wisdomtree associate director of research Aneeka Gupta expected European financials that had been strongly correlated to “no-deal” Brexit risk to outperform in the near term.
