So in the end the Liberal Democrats and the Brexit Party ended up doing more damage to Jeremy Corbyn’s Labour Party than to Boris Johnson’s Tories. To some extent this is like 2015. As discussed in previous posts, the so called Corbyn bounce in 2017 was in fact largely an unwinding of the referendum effect that led to Ed Milliband losing so heavily in 2015. Back then, the SNP in Scotland got 1.5m votes and 56 MPs, all but wiping out the traditional Labour stronghold of Scotland that had produced most of the Labour cabinet. At the same time, UKIP took 4 million votes and while it only got 1 MP, it took more from Labour than from the Conservatives. The two referendum parties plus the collapse in the LibDem vote thus produced David Cameron’s surprise victory in 2015.
It was the absence of either effect, rather than his policies that was the main reason that the country appeared to swing to Corbyn in 2017, as in reality he only had 4 more seats than Gordon Brown did when he lost to the Coalition in 2010. This time, something similar happened, with the SNP gaining at the expense of Labour and the Lib Dems and the Brexit Party taking the role of UKIP , both splitting the labour vote in a sufficient number of seats to produce a near landslide for Boris Johnson’s Tories. Thus the benchmark for Corbyn should really be the Milliband level of 230 seats. On the one hand this doesn’t matter much for investors, as the new government is now in place for 5 years, but it is likely to be a major focus of media attention in coming months, not least as the Democrats pick their candidate and the US decides its next President. So one uncertainty down, another one to come!
That aside, what do we think it means for the UK economy and markets in the near term.? Well obviously it’s positive for the utility and other stocks who had been under threat of nationalisation, even if it was minor, but it also reflects a likely shift left economically and right socially. Boris Johnson will assume a mandate to spend on infrastructure – likely a shift away from Grands Projets like HS2. towards multiple smaller initiatives, particularly internal links in the North of England where his new voters are. As such, we see a shift from growth to value stocks likely to take place, somewhat similar to the rally we saw in early 1999 as markets realised that the sell off triggered by the LTCM collapse was not the dire economic warning that the bulls in the bond markets had been proclaiming. A rebalancing of multiples rather than a projection of growth will be the first stage. The fact that both groups in the UK tend to have high dividends will also highlight the relative merits of equity yields versus ultra low gilt yields and may trigger some asset allocation.
On currencies, they have been the most active, indeed almost the nly asset class that has tried to ‘play’ Brexit. As discussed ahead of the result, sterling bounced sharply and our instinct is to fade such sharp rallies. We suspect that the cross to watch will increasingly be GBP to Euro, which went through 1.20 again at the end of the week. The European banks will be one of the stories to watch for 2020.
