The other possibility for a surprise would require geographical divergence and tactical voting in an unprecedented amount. While not impossible, tactical voting historically is only effective when parties cooperate with each other. The hostility between Labour and other remain-oriented parties today makes this outcome even more remote.
The high conviction around a Tory majority has created a strong market consensus anticipating future government policies. As a start, Boris Johnson is expected to easily pass his withdrawal deal in Parliament and engineer a smooth legal departure from the European Union by 31 January 2020. This near-term clarity could help provide some tailwind to sterling, which has already breached the 1.30 mark versus the US dollar. Drawing on our research of emerging market currencies, we find that markets enjoy another limited bounce upon an election result, even if widely expected. Hence, we would expect political clarity to support up to another 2% appreciation by the new year.
Given that UK equity markets are majority foreign-owned, they have also rallied ahead of the election. Here too, we believe a consensus outcome should not lead to any reversal as the short-term macro backdrop will likely be favourable to equities (and other risk assets).
First, there will be some measure of fiscal expansion. Second, some of the Brexit uncertainty premium would potentially dissolve and should help unlock at least a portion of investment sitting idle. Figure 2 shows just how severely business investment ground to a halt after the 2016 referendum. While it will certainly not catch up to the pre-referendum trend, investment growth should definitely turn positive in 2020, especially for domestic-oriented companies.
And third, global macro forces should help support external demand as central banks around the world inject liquidity and key trading partners (e.g. Germany) recover from their 2019 lows. In our view, a stable, if not slightly appreciating, exchange rate should also enable the Bank of England to keep rates unchanged for the first half of 2020, all in all providing a supportive environment for UK stocks.
Figure 2: UK Business Investment 2010-2019 (rebased at July 2010=100)