UK Election 2019 – UK Team Comment

David Clark shares his thoughts on what the market can expect following the Conservative landslide last week…

So now we know.

The Conservative Party has won a substantial majority and Labour and the Lib Dems have been put to the sword.

Sterling has predictably rallied and there have been some positive moves in a number of UK stocks since Friday given that a large portion of risk has now been nullified.

UK exporters should benefit.

The City will remain open for business and those companies that have been putting off any decision to come to the market will now be dusting off their plans and moving forward. The utilities sector may well experience a relief bounce as the threat of state sponsored theft recedes and larger, liquid stocks have rallied as the notion of employee trusts (which had very little to do with actual employees) is consigned to the bin.

We can expect the likes of Financials and Housebuilders to do well as will sundry other stocks who are would be beneficiaries of Mr. Johnston’s spending splurge.

At Saracen, we had positioned our UK portfolios for a Conservative victory, though the scale of this has taken us somewhat by surprise. We would expect our holding in Premier Miton to perform well as it has more gearing to an upward movement in UK equities than other listed UK asset managers, in addition to our holdings in stocks such as Ibstock, MJ Gleeson and Galliford Try. Alpha Financial Markets will be relieved that their client base will continue to operate within a business-friendly environment. We have a significant exposure to domestic earnings as well as having low exposure to non-sterling dividends and earnings. Stronger sterling is helpful for our strategy and we have recently added to our exposure in UK smaller companies which, up until now, have been in the doldrums. In addition, we have a large exposure to UK financials and would expect gilt yields to rise from here while banks and others rally.

In Scotland, it was a good night for the SNP. Ruth Davidson, the former Scottish Conservative leader had said that she would go ‘skinny dipping in Loch Ness’ if the SNP won 50 seats. It looks as if she (and we) will be spared that but it was a close-run thing. The usual rhetoric around Indy Ref 2 has begun already in earnest and Nicola Sturgeon has concluded, to no one’s surprise, that the SNP have a ‘clear mandate’ for it. This, despite the fact that 54% of Scotland voted for non-SNP candidates.

Beyond the stock market reaction, the Conservatives have pledged to get Brexit done by the 20th January 2020. That now seems very likely indeed. However, that does not mean that the Brexit risks have all dissipated. I’m afraid we are just getting started here. Now the real work begins with the negotiation of trade deals, the terms of trade and I would bet my bottom dollar that we have not heard the last of the issue concerning the Irish border. It is very difficult to say how the next round of Brexit negotiations will affect individual stocks. Whatever the terms of trade end up being the only certainty is that those companies who habitually import and export goods will see an increase in bureaucracy and almost certainly longer lead times for the movement of goods. Companies will have to adapt.

Boris has confidently said he would expect all these matters to be successfully resolved to everyone’s mutual satisfaction by the end of 2020. That’s a big ask and the jury remains out.

David Clark, Co-Manager, TB Saracen UK Alpha Fund & TB Saracen UK Income Fund