Weekly Market Update

16/12/2019

A convincing victory for the Conservative Party in the UK general election provided relief for the UK equity market, while potential progress in trade negotiations between the US and China provided positive momentum for overseas markets particularly Asia.

The Conservative majority removes some political uncertainty as it effectively puts an end to the argument about whether the UK should change its mind about leaving the EU. Although a Conservative majority was widely seen as the most likely outcome ahead of the polls, the initial market reaction was significant, largely due to the margin of the victory and that the breathing space the Prime Minister has. In addition, the next Budget, expected in February, could see fiscal spending, offering heavy spending plans in areas such as infrastructure, and therefore stimulatory for the domestic economy.

This is a significant step forward in the overall Brexit process, which has clearly held back the UK economy. As such, in the near term, UK assets should benefit, and economic growth accelerate. However, several challenges remain which could limit growth and further currency appreciation. Firstly, the UK will now enter negotiations with the EU on the permanent trading relationship. Given the degree of divergence implied by the Withdrawal Agreement Bill, in some ways this phase of Brexit may prove just as challenging as the past three and a half years.

Secondly, the UK continues to experience the productivity slowdown with reduced foreign market access and competition.

Elsewhere, there was positive political noises across the US & China, while the US central bank kept interest rates on hold, and added a more dovish message that it expects to make no changes in either direction throughout 2020 as moderate economic growth and low unemployment are expected to continue through next year’s presidential election.

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