UK election: Conservative win sharpens Brexit focus

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

The Conservative Party’s general election win may spell certainty for Brexit but it also raises questions over how the government will meet its pre-election public spending promises. Managers from BNY Mellon Investment Management firms consider the likely market impacts of the Conservative majority.

The Conservative Party majority in the UK election, consolidating Boris Johnson’s position as British Prime Minister, spells some certainty for the Brexit question and looks set to boost market confidence, at least in the short-term, according to BNY Mellon Investment Management commentators.

Mellon chief economist and macro strategist, Vincent Reinhart, says: “A Conservative Party general election win represents victories for Boris Johnson, proponents of exiting the EU and much maligned-pollsters. The latter correctly predicted the Conservative win, giving financial markets a head start in pricing in the consequences.

“Important and contentious details to be filled in Johnson’s Brexit deal subsequently include bilateral trade deals to replace those covered by the EU ones, especially with the EU. Even with these issues obscuring the outlook, investors are likely to be more receptive to risk taking and to look more favourably at the exchange value of the pound. Investor confidence should be also buoyed by the certainty an assertive Labour government is not in place to reregulate all and nationalize some industries.”

Beyond Brexit and a potential boost in market confidence, however, the election win will also drive new focus on Conservative manifesto spending commitments, as the party pledged a £3bn increase in day-to-day spending.

Spending pledges

With markets digesting the latest news, Newton’s fixed income manager, Howard Cunningham, expects renewed volatility and uncertainty ahead, as he believes question marks remain over both the Brexit negotiations – beyond the much debated withdrawal deal - and wider government spending commitments.

”Under the Conservative plans, current spending and tax revenues are each about £3bn higher than previous budget forecasts with most of the extra tax take coming from canceling a planned further cut in Corporation Tax rates from the next fiscal year,” he says.

“The problem with their approach is that by ruling out any increases in the three main personal taxes (Income Tax, National Insurance and VAT) they have closed off one financing avenue if greater public spending is needed eg. by the UK National Health Service, or if pursuit of a clean break with the EU at the end of 2020 leads to further economic weakness. Extra borrowing would therefore be required to plug the gap.”

Commenting on the likely implications of a Conservative Party win for monetary policy and the Bank of England, Reinhart adds: “Expect patience from the Bank of England, in part because it already frontloaded monetary policy accommodation by easing quickly after the 2016 referendum and subsequently moving the bank rate up marginally.

“Officials will keep the policy rate on hold until some of the dust settles on the net effect of exit on the balance of aggregate demand and supply. For the former, the lack of clarity about the outlook impedes investment. As for the latter, disruptions in supply chains raise costs and cut output.”

Mellon infrastructure manager, Jim Lydotes, says he believes the election results could prove positive for the UK infrastructure market, given concerns a Labour government might have nationalized some utilities.

“Given where valuations sit today, we do think that the market has (rightly) coalesced around the belief that these assets will not be nationalized, and thus we would not expect an outsized move from traditional water and energy assets with a Conservative Party win,” he adds.

The UK’s departure from the European Union (EU) looks set to be the most pressing issue facing the Johnson administration. During the run up to the election, the Prime Minister underlined his determination to take the UK out of the EU by January 31 in order to ‘Get Brexit done’. Before the election Johnson had promised to bring his previously agreed Brexit deal back to Parliament before Christmas in a bid to leave the EU by the end of January.

Gilts – UK government debt
Period of austerity – A period of time when a government is trying to reduce its public spending
Fiscal spending – Spending by a government

Hung parliament – a term used in legislatures under the Westminster system in the UK to describe a situation in which no particular party or pre-existing coalition has an absolute majority of members of parliament.

VAT – Value added tax, a sales tax on goods and services in the UK

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited and Newton Investment Management (North America) Limited (NIMNA Ltd). In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request.

Mellon is a global multi-specialist investment manager dedicated to serving our clients with a full spectrum of research-driven solutions. Mellon Investments Corporation (Mellon) is a registered investment adviser and an indirect subsidiary of The Bank of New York Mellon Corporation.

Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Adviser inc, Newton, Mellon and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon.

© 2019 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Fl., New York, NY 10286.