13 December 2019

It’s not all plain sailing

The people have spoken. The Conservatives have taken power with their largest majority since the 1980s and the reign of Mrs Thatcher.

The pound and the stock market reacted positively to the news. It isn’t that investors are backing our exit from the European Union against all other options. It is more that the uncertainty that has been hanging over markets for the last three plus years has been lifted. For the time being, at any rate.

Markets do not like uncertainty. When the outlook is clouded, as it has been since the surprise result in the referendum, decisions are deferred. The good news that comes with this election result is that we now know the Government has a sufficient majority to push ahead with its plans to strike out on its own and leave the bureaucracy of Brussels behind. The not so good news is that we do not yet know what the UK outside the European Union might look like.

There are some imponderables. Boris Johnson’s determination to reach a deal with Europe before the end of 2020 does not allow much time for the detailed negotiations over a wide range of issues – not just trade – to be completed satisfactorily. On the other hand, he should not be in thrall to the hard-line European Reform Group that made Theresa May’s time in office such a nightmare. He now has the flexibility to delay if need be and to reach an agreed solution, rather than be forced out without a deal.

But there are national issues at play here too. The success of the Scottish National Party raises the spectre of a second referendum on independence. It may not happen, of course, and if it did there is no guarantee that Nicola Sturgeon will get her way, but it could be a distraction in the early days of the Conservative administration. Moreover, the DUP were one of the clear losers in this election and Northern Ireland now has more nationalist MPs than unionists. Given that the border with the Republic of Ireland remains a contentious issue, this could be a further aggravation for the new government.

The general view amongst investors is optimistic, though. The Prime Minister is known to be a fan of big projects, so infrastructure spending is likely to rise. Positive comments from President Trump on a likely trade deal with the US did no harm and perhaps of greater importance were the stories circulating that a deal with China had at last been reached. This prompted US markets to attain new highs and, if true, could do much to help confidence around the world.

The result is probably the best we could have hoped for as investors, mainly because the alternatives looked significantly less appealing. We now have to wait to see what transpires, both in terms of trade deals and in how Boris Johnson plans to heal the rift in this country that three and a half years of Brexit uncertainty has created. He has a tough task ahead of him.

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