Updated: Jun 21, 2020
Wow. What a week! An emotional rollercoaster. Somehow, irrespective of Stormzy, Gary Neville, Lily Allen, and Danny De Vito’s rallying for people to vote for the Labour Party across the United Kingdom, Boris Johnson, the Conservative leader, recorded the largest majority victory for several decades. It was emphatic, resounding, and somewhat embarrassing for Jeremy Corbyn, after what outwardly appeared to be a very close battle. The result, however, ensures that Corbyn will step down from his position as figurehead of the Labour movement, and that Bojo will hopefully follow through on his promise to get Brexit done. So, with that in mind, I thought that, for this week’s Week in Review article, we’d solely focus on the aftermath of the election – what the implications are for the stock markets, and why. So sit back, relax, and let’s find out what a Conservative triumph really means for the financial world.
For several years now, the United Kingdom has experienced uncertainty. On June 23rd 2016, a referendum expressed a majority consensus across the country – a desire to leave the European Union. Over three years later, we may finally (hopefully) be heading in the right direction. Boris Johnson, the leader of the Conservative Party, and the confirmed, democratically-elected Prime Minister, has campaigned to “get Brexit done.” Now that it has been established through the election on Thursday that the overwhelming of the voting public supports him, he’ll be hoping to strike an agreement to leave the EU as soon as possible, and before the deadline of January 31st 2020.
What does this mean for the financial markets? Well, the Pound Sterling (GBP) instantly rose against the Dollar (USD) since the results of the exit polls of the election emerged late on Thursday evening. In fact, it leapt 2.5% to just above $1.35 – one of the biggest daily increases ever! If you’re after some further interesting statistics, it is the highest that the Pound has been against the Dollar in over 18 months, and the same against the Euro in almost four years. Good job Boris! The FTSE 100 index (the list of the 100 biggest publicly-traded companies in the country) of UK shares rose by about 1.5% and the FTSE 250 by more than 3.5%.
As a quick side-note, if you’re not too sure what a rise in the Pound Sterling really means for you, I’m going to break it down.
Before the exit polls on Thursday evening, let’s say that £1 equalled $1.29. This meant that, if you went to the United States on holiday, for every Pound that you exchanged, you would receive $1.29 USD. However, when the Sterling surged against the Dollar on Thursday evening, we saw the rate change to £1 = $1.35. Now, if you went to the USA with £100 and wanted to convert it to Dollars, instead of £129, you would receive £135 back (theoretically speaking). As UK citizens, that’s good news.
It also means that, for UK businesses, it should be cheaper to import foreign products, such as fruit and vegetables, or even oil, as our Pound has strengthened, so we can get more for our money.
As a consumer, this might not impact us, as there is no guarantee that shops will pass on these cheaper importing costs onto us. We also don’t know how long the strengthened Pound will last. Nevertheless, the election brought about more political certainty, for the first time in a while, and that’s good news.
There are several explanations for the rise in the Pound on Thursday evening. Firstly, let’s talk about Brexit. It is fair to say that the markets haven’t warmed to the Conservatives’ mandate of getting Brexit done over last couple of years. This is largely down to the fact that it will inevitably weaken the U.K. economy, because it will be substantially more difficult to trade with EU nations, as well as other global regions. Markets and investors hate uncertainty, and this is exactly what Brexit has brought. However, following the election this week, with a stable Tory government in place that clearly has the backing of the nation, it is assumed that we will have more certainty over the Brexit process, hence why the Pound has risen. The Prime Minister now has a majority in parliament, and so there is significantly less risk of a no-deal Brexit taking place, or of Brexit legislation not being passed by MPs.
In summary, the UK election, and Boris Johnson’s overwhelming victory, has fostered a climate of increased certainty, which has been reflected in the financial world by a rise in the Pound Sterling. After all, this makes sense. According to James Athey, a London-based, experienced investment manager, “any decisive result is better than an indecisive result…for me, the longer the purgatory went on, the more damage it would do.”
There are two sides to every coin, and just as the Conservative victory offers a reason for the aforementioned market surge, Corbyn’s failure provides another. It is easy to understand why…
Jeremy Corbyn vowed during the electoral campaign that, if elected Prime Minister and resident of 10 Downing Street, he would nationalise large chunks of the UK economy, from mail and rail providers, to wi-fi and water. Of course, what left the markets in even more distress, as if hanging on to the edge of a cliff, was that Corbyn, together with his Shadow Chancellor, John McDonnell, were very unclear and rather blasé when it came to discussing the finer details of how shareholders of these companies would be compensated during the process the nationalisation. The Labour leader believed that, contrary to lots of legal precedents, parliament would have the right to determine how much compensation these shareholders would receive in return for the nationalisation of their assets.
To give an example, imagine that you, as an individual investor, held shares in British Telecom (BT). If Corbyn had come into power, he would have wanted to re-nationalise BT, so it would become a public good, run by the government. Corbyn would then have wanted parliament to dictate how much compensation you would receive for the shares that you would have to give up. Come on Jezza – what were you thinking? After all, his broadband nationalisation policy was blasted as “less open-reach, more over-reach,” by Lib Dem spokesman Sam Gyimah.
To make matters worse for Labour, since the 2017 UK general election, Corbyn had promised to nationalise these companies, and, as a result, the share prices of these businesses clearly underperformed in comparison with the wider British stock market. However, now that there is no fear of Jeremy Corbyn coming to power and implementing these nationalisation policies, these companies have seen a rise in their stock price, which has boosted the wider UK economy and stock market performance.
Again, taking BT as an example, the company’s share price when the market closed on Thursday was 189.85p. The results of the election disseminated throughout the country over Thursday evening and the early hours of Friday morning, and, when the market reopened on Friday, BT was trading at 205.75p. This is a remarkable 8.38% increase in its share price – just overnight! Similarly, Royal Mail shares rose by 7.3%, and National Grid by 8.1%. Stagecoach, the bus company, increased by 14%, after the threat of it being nationalised was mitigated by a Conservative victory.
What else happened?
Well, house-building companies saw their share prices rise significantly. In the FTSE 100, Taylor Wimpey, Persimmon and Barratt Developments rose by over 11%. This is because the Conservatives have vowed to build more than one million new homes over the coming years, amidst the current housing shortage.
Furthermore, with increased certainty from the Conservative win, there are hopes of a stronger UK economy, which increased the share price of domestic banks such as Lloyds, Barclays and RBS.
There were, of course, parties that lost out as a result of the election. Companies that earn significant proportions of their revenue in foreign currencies saw their share price dwindle. This is because, with the strengthening of the Pound, companies that earn a large amount of their revenue in USD, such as Glencore, GlaxoSmithKline and Diageo, have seen their revenue effectively lose value.
What happens next?
Regardless of the increased certainty from the Conservative victory, there is still a lingering sentiment of uncertainty. This is because, whilst undoubtedly easier for Boris Johnson to secure a deal to withdraw from the European Union, it is by no means guaranteed that he will do so before the looming deadline. Investors do not want a hard Brexit, and if Johnson cannot guide the UK to a softer one, shares could plummet.
The election saw large gains for the Scottish National Party (SNP), and, unsurprisingly, there are fears of another referendum on Scottish independence from Britain being called, which would further disrupt any political stability.
Moreover, while initially, all looks rosey for the Conservatives, it is still hard to predict what Brexit will mean for the UK and its relationship with the incumbent EU countries, the US, and its global counterparts.
Just because, as shown above, President Trump seems optimistic, it can almost be seen as a case of actions speak louder than words. How easy will it be for there to be a UK-US free trade deal that is amenable to both sides? How damaging is Brexit going to be to UK trade? No one knows…just yet!
As a writer for The Economist brilliantly concludes,
“Markets are fickle. Some are worried by Mr Johnson’s other economic plans—including a vague pledge to boost state aid to ailing companies, which would make the economy less dynamic. The Conservatives have few ideas about how to raise Britain’s feeble rate of productivity growth, which is holding back the economy. And the economic effects of Brexit, which now looks destined to happen, remain highly uncertain. Mr Johnson’s honeymoon with the City may not last.”
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Please make sure to share this with your friends! Understanding the relationship between political events and the financial world can be difficult, and that is why I like to write the Week in Review articles – so that everyone, regardless of their pre-existing political or financial knowledge, can understand the latest current affairs and trends.