Another Election – Another Surprise !

10/06/2017

Renowned fund manager Neil Woodford comments on the election result and the impact for the investment market:

“So, we’ve had another election and received another surprise. At the start of this campaign, I expected the Conservatives to secure an increased majority – clearly, the party and the pollsters had anticipated the same outcome. Instead, the Tories have lost their overall majority and we are faced with the prospect of a hung parliament. The Conservatives have, however, won the election and Theresa May has already confirmed the party is in a position to form a functioning and sustainable administration, with support from the Democratic Unionist Party (DUP).

In all the heat and light that accompanies an unexpected political outcome, a lot of extreme conclusions have been discussed by market and media commentators. From where I’m sitting, however, economically not a lot has changed. In fact, in some respects, the outlook for the UK economy has actually improved.

First, with regard to fiscal policy, my expectation now is that the new Tory-led administration will adopt a more stimulative position. Theresa May does not have the mandate that she had hoped for –  that, in my view, will mean that the new administration will embrace a looser fiscal strategy going forward – borrowing more and spending more. Overall, this will be positive from the perspective of UK economic growth. I would also expect, for example, the cap on public sector pay to change, as part of this fiscally-stimulative agenda.

Second, if the Conservatives successfully form an alliance with the DUP to deliver a collective parliamentary majority, we will have an administration with enough seats to function effectively. Importantly, this should mean that the ‘hard Brexit’ outcome that the market has most feared becomes less likely. In wooing an alliance partner, the Tories will have to offer some concessions and I would imagine the DUP will be keen to secure an open border with Ireland as an important part of those negotiations. Membership of the EU Customs Union could be seen as a minimum requirement if a deal is to be struck with the DUP and, in turn therefore, the probability of a softer Brexit outcome has risen. At the same time, the risk of a second referendum on Scottish Independence appears to have substantially diminished.

Many commentators have suggested that the commencement of Brexit negotiations to be delayed, Theresa May has confirmed they should start as planned in a few days’ time, presumably led by David Davies. It is unlikely that anything important will be decided until after the German elections in September, so there is plenty of time for the UK’s political dust to settle.

As far as financial markets are concerned, we’ve seen a modest sell-off in sterling this morning, which has, with the same knee-jerk reaction we saw after the Brexit vote, boosted the share prices of the large dollar-earning businesses that dominate the UK stock market – creating a 1% rise in the FTSE 100 on Friday. Meanwhile, the share prices of more domestically-exposed businesses have weakened slightly. Overall, however, the market’s initial response has been relatively measured, not least in the currency and bond market.

I remain cautious on the outlook for the global economy, but more positive about the prospects for the domestic economy. If anything, with its implications for looser fiscal policy and a softer Brexit, the election result has made me even more optimistic about the UK economic outlook.

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