UK assets soar on large Conservative majority

Summary:

• Landslide election victory for Conservatives

• 78 seats majority with 1 seat to declare

• GBP and domestic focused UK stocks soar

What had been billed as a close thing turned out to be anything but as the UK election saw a decisive victory for the Conservatives and their leader Boris Johnson who has now delivered the biggest majority for the party since the 1980s. Given what the polls showed leading up to the vote the outcome had effectively boiled down to a binary result of either a Conservative majority or a hung parliament and as soon as the exit polls were released, just after voting closed at 10PM, it quickly became clear that barring an unprecedented swing this would be a big victory for the Conservatives.   

Source: PA Media via dpa-infocom

*The 1 seat not to declare is St. Ives, with the results West Cornwall constituency delayed due to ballot boxes from the Scilly isles having not been collected yet due to bad weather. 

Looking at the market reaction it’s quite clear that on the whole it’s been strongly positive for UK assets. Investors have breathed a huge sigh of relief at the decisive outcome, due to both the clarity that it brings on Brexit (at least in the near term) as well as the avoidance of a left-wing Labour government. The pound rose rapidly as soon as the exit poll was released, surging over 300 pips or 2.5% against the US dollar while you have to go back to the middle of July 2016, less than a month after the EU referendum, to find a strong GBP/EUR rate.

GBPUSD jumped sharply on the exit poll, surging over 340 pips in less than an hour from the release. Since then the market has pared back a little but still remains firmly bid. Source: xStation 

Banks, Housebuilders and Utilities jump

Overall the stock market has reacted well to the result with shares in banks, house building firms and utility companies amongst the best performers. The top 3 places in the blue-chip index are occupied by housebuilders with Taylor Wimpey, Berkeley Group and Barratt Developments all sitting on double-digit gains. RBS, Barclays and Lloyds Banking Group are not too far behind with all these firms showing similar moves to those seen back in October when the pound also soared as Boris Johnson brought his new deal back from the EU. 

Shares in Berkeley Group (BDEV.UK on xStation) have gained over 12% this morning after the election result became clear. Source: xStation 

If the aforementioned stocks are rising on Brexit-related hopes, the gains seen in the utility sector can be attributed more to the avoidance of a Labour government and the proposed renationalisation that would have likely ensued. A relief rally can be seen in SSE, Centrica, United Utilities and BT as the threat of nationalisation disappears for the foreseeable future.

It is worth noting that this is still far from an ideal backdrop for UK assets, rather the best scenario out of a bad bunch. With Boris Johnson’s promise to take the UK out of the EU by the end of next year we could well end up with what is effectively a no-deal Brexit. However, the size of the Conservative majority plays into the hands of a softer Brexit now, as the PM will not have to pander to the more Eurosceptic wings of the party and not be reliant on universal support from Tory MPs to pass Brexit-related legislation. Almost everything is looking rosy for investors for the first time in quite a while with reports of a US-China trade deal also boosting sentiment and while longer term concerns may still linger, the markets seem well placed to finish the year with a flourish.