UK Elections: Boris Johnson Wins An Absolute Majority
AT A GLANCE:
The result of the general election is a large parliamentary majority for the Conservative Party. Boris Johnson obtained 362 seats out of 650, according to the BBC's estimates. The extent of Labour's defeat prompted Jeremy Corbyn to announce that he will not run for the next election. The Scottish National Party is gaining enough ground to consider holding another referendum on Scotland's independence.
The Conservative government will now be able to get on with the task of ratifying Britain's exit from the European Union by 31 January 2020. A transitional period will then begin, with a view to defining future relations between the European Union and the United Kingdom. It is very likely that this transitional period will be extended by at least one year.
At the end of the election, the British pound rallied by more than 2% against the dollar to slightly below 1.35. Sterling is now trading at around 0.83 against the euro. The exchange rate is expected to stabilise and we plan to revise up our target price for the next 12 months.
UK equities still have scope for more upside due to the significant discount. Domestic stocks should be favoured, but large caps are also attractive.
The British people voted in favour of leaving the European Union by the end of January
The mandate given by the population is clear. After securing a large majority in yesterday's general election, Boris Johnson obtained the green light to ask Parliament to ratify the agreement to leave the European Union before the end of January 2020. A transitional period will then begin, with a view to defining future relations between the European Union and the United Kingdom. It is very likely that this transitional period will be extended by at least one year.
Towards a gradual recovery in economic activity from the second quarter 2020
Consumer confidence is at a 2010 low and business confidence at a 1-year low. A very gradual improvement in the business climate is in sight. The recovery should be helped by a fiscal stimulus and the Bank of England's decision to keep interest rates on hold.
Sterling has fully priced in a ratification of the divorce agreement with the European Union
Anticipating a victory for Boris Johnson, the pound had risen since early October from 1.22 to almost 1.32 against the dollar and appreciated from 0.90 to below 0.85 in the same period against the euro. At the end of the election, the British currency rallied by more than 2% against the dollar to a level slightly below 1.35. Sterling is now trading at around 0.83 against the euro. The exchange rate is now expected to stabilise with a long investment position close to a 5-year high. We expect to revise up our target price for the next 12 months.
Potential for UK equities to rerate further
The reduced risk of a Brexit without an agreement has fuelled a rise in stock prices over the past two months, especially in domestic stocks, which are far less affected by the pound's rise. There is still decent upside potential for UK equities, which, with a weighting of around 5% of the global equity market, is the third-largest capitalisation. Domestic stocks should still be ones to favour, having been most exposed to Brexit uncertainties, and they are therefore the best placed to benefit from the economic recovery. However, the large caps index (the FTSE100), also has good potential for a further rerating, thanks to an expected recovery in the global economy in 2020. Sterling is no longer expected to be a constraint now that it has made good progress and it should stabilise.