It’s beginning to feel a lot like certainty!

13 Dec It’s beginning to feel a lot like certainty!

Whilst the term ‘landslide’ in election terms is probably open to interpretation, as results go, last night’s was about as close as it gets ! The size of the Conservative majority is the largest for well over 30 years and this should now smooth the way for the UK to leave the EU by the end of January.

But in all the euphoria, investors may have missed the type of 2 for 1 offer usually reserved for the January sales. The election result coincided with what looks like an agreement in the US:China trade talks, or at least the first stage of one. As you will have heard us say before, markets hate uncertainty and at a stroke it appears two major concerns for the markets were cast aside almost simultaneously.

The market reaction has been overwhelmingly positive. First to react was Sterling which spiked strongly against the dollar, initially up 2.5%, though at the time of writing this has moderated slightly. More clarity on the Brexit issue has however helped the Pound improve from a lowly $1.20 in the summer to $1.34. We see this trend continuing and fair value for the UK currency probably lies in the $1.35-1.40 range.

On open, the equity market soared, with the FTSE All Share jumping 2%, not only on the removal of uncertainty, but in the belief that a Conservative government will be more business-friendly. But the major beneficiary appears to be domestic and value stocks which have largely been unloved by investors since the EU referendum in 2016. One example is the banking sector, with Lloyds and Barclays both up 8% this morning and RBS up 11%. We have long argued that in an international context, the UK market is undervalued and we see the removal of some uncertainly as a catalyst for global investors to stock-up (no pun intended) on UK shares.

Government bonds unsurprisingly have had a much tougher morning with the yield on the 10 year UK gilt backing up (prices falling) on the expectation that Chancellor of the Exchequer, Sajid Javid, will embark on a spending spree, to be funded by increased borrowing, or put another way, massively increasing the supply of gilts (government bonds).

As anyone who reads our 6 monthly profile reports will know, at CDC we have long been tilting our portfolios towards equities and away from bonds. Whilst this blunted performance in 2018, the recovery in 2019 has been quite astonishing, with all profiles outperforming their benchmark over one, three and five years to the end of November. In absolute terms, this leaves return on CDC portfolios for the calendar year to date, between 11 and 17%, depending on which profile you have chosen.

We will be writing to you more fully in January with our next half yearly profile update but the reaction of financial markets this morning completely vindicates our decision to overweight equities at the expense of bonds. We see no immediate reason to change this view.

This morning’s developments, along with the positive impact it has had on CDC portfolios will bring some long awaited cheer to our readers. We wish you all a very Merry Christmas.