Investments  

The dawn of a new era for UK's economy

The dawn of a new era for UK's economy

The political paralysis that has been traumatising the UK for the past three-and-a-half years has finally been lifted.

The Conservative party majority of 80 seats, the biggest since Margaret Thatcher’s third victory in 1987, means the newly elected government will now be able to move forward at pace with Brexit, as well as implement a range of domestic economic programmes such as dealing with the NHS.

International asset allocators are now looking at the UK for the first time in many years, and this will be the catalyst for a significant rally in sterling and UK equities.

International investors have shunned UK investments since the EU referendum, but this is likely to change in 2020.

Shifting horizons

The decisive outcome of the general election means the prime minister and the Conservative party have a clear run for the next five years, during which investor confidence will return.

Since June 2016, large, mid and small-cap UK equities have suffered, particularly those doing business primarily in the UK. However, the landslide victory for the Tories should attract foreign capital back into the UK and encourage domestic companies to reinvest in their businesses. UK equities are positioned to outperform their peers in Europe and in the US.

Following the one-sided election result, both the FTSE 100 and FTSE 250 have rallied, and sterling rose 2 per cent per cent against the US dollar, hitting a 39-month high against the euro. We expect this trend to continue well into the new year.

Opportunities and concerns

With the restoration of political order, it is likely that many companies, particularly those in financial services, will expand their UK operations, specifically in London. 

This investment will trickle down into other areas of the economy. For example, it will support the commercial property market.

Investors should consider increasing exposure to commercial property and to companies that generate the majority of earnings from within the UK, namely FTSE 250 firms.

UK interest rates are likely to stay low for the next 12 to 24 months and the outlook for fixed income securities is negative. The chance of significant price appreciation is much lower than price depreciation.

Real yields in the gilt market are negative (nominal yield less the inflation rate), and prices are expected to trend lower with returns significantly less than the average dividend yield in the UK equity market.

In a multi-asset portfolio, the allocation to gilts should be close to zero and corporate bond exposure should be limited to duration neutral. Gold and dividend-paying stocks are a better proxy for defensive assets in the current environment.

Key Points 

  • The Conservative win last year means the government can push ahead with Brexit.
  • The FTSE 100 and FTSE 250 responded positively to the election result.
  • More Trumponomics would be positive for the US economy.

For UK-based investors with international holdings, foreign exchange hedging will play a vital role in the coming year. Sterling is likely to trade higher through 2020, returning back to pre-referendum levels versus the US dollar and euro. A 10 to 20 per cent upward move in sterling is very realistic and a currency overlay programme is essential to protect against capital losses.