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UK Economic Outlook: UK elections

13 December 2019
The majority is currently 78 seats which is sufficient for Boris Johnson to govern more or less how he wants. This would, in theory, allow him to ignore the right-leaning Brexit Spartans that so plagued Theresa May’s government and move towards the more centrists ground he showed as Mayor of London. This does, to some extent, depend on the views of the recently elected cohort. What is certain is that Brexit will now happen next year under Boris’ deal. This does not mean than Brexit is done, not by a long shot. We still have to negotiate the future relationship and trade deals which are supposed to be completed by the end of the 2020. In the campaign Boris said he would not extend this, with a majority of 80 he could extend if he chose to. However it is important to be cognisant that Brexit risks remain even after the immediate leaving deal is passed by Parliament. 
 
Markets have reacted more or less as expected with Sterling exhibiting the largest moves. Sterling rose 2.2% against the US Dollar overnight meaning it has now increased by 11.5% since its low point in August. Moves against the euro were more muted with Sterling climbing by 1.6% overnight completing an 11.7% increase since August. UK equities, which have recently underperformed as Sterling rose, were up around 1.5% this morning , in line with other European indices but slightly underperforming Asian markets which were up around 2% overnight. The more domestically focused FTSE 250 whose constituents gains more of their earnings in Sterling rather than dollars or euros was up 4% overnight to reach a new all time high. 
 
UK yields were largely unchanged though short dated real yields have moved up. For pension schemes therefore the impact of the election has been muted. Yields are little changed, equities are up but were up globally before the results so it hard to assign cause and effect. Sterling has risen so owners of foreign currency assets may have lost out but any hedging of foreign exchange positions would have mitigated this. 
 
Going forward we now have certainty over the date of Brexit but this election has not resolved all Brexit related issues. Economically the impact of Brexit remains, it will be negative for GDP. How the government mitigates this through the tax and spending system and how the market reacts to this, particularly through gilt yields, will be one of the key areas to watch over the coming year. As an aside, whilst there will likely be calls for a Scottish Indiref 2, it seems unlikely that Boris, with his majority will serious entertain such an idea; as a result, this appears a relatively low market risk right now.

The author

Robert Scammell

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