UK Election: Will Tory Victory Bring Investors Back to UK Equities?

As widely expected, the Conservative Party emerged victorious in the UK general election. Our Colin Morton anticipates UK equity markets will welcome the outcome, but cautions that some uncertainties remain.

A Conservative victory in the UK general election would seem to be the easiest result for equity markets to digest.

Still, our experience during past election periods is that markets tend to over-react in the immediate aftermath of a given result. We’re hoping that sort of knee-jerk reaction will allow us to identify some potential opportunities over the coming weeks.

The market hates uncertainty, and the general consensus among observers is that the Conservative victory will preserve the status quo. We’re not expecting any increase in income tax or value-added tax, and corporate taxes should remain stable. In light of this result, we would anticipate a likely rally in the pound. We think domestic UK stocks will likely do better than UK-listed international names, as sterling strength tends to weigh on export-oriented multinational companies.

Incidentally, that’s the trend we’ve seen since Prime Minister Boris Johnson unexpectedly agreed to the withdrawal deal with the European Union (EU) back in October: an outperformance of the more domestically oriented stocks.

Brexit Uncertainty Continues

This latest election result still presents some uncertainty around the Brexit resolution. However, in large part, investors seem to have a better understanding of the implications of a Tory win, versus a Labour victory or another hung parliament.

Prior to the election, Johnson promised he’d successfully conclude the free-trade negotiations with the EU before the end of the year.

Most people, including us, are skeptical that he can deliver on that.

Some observers believe a strong Conservative majority could lead Johnson to play hardball with the EU as his government negotiates a trade deal. In that regard, a no-deal Brexit remains on the table, a likely shadow on the market’s medium-term outlook.