What the Conservative victory means for SA

Boris Johnson’s Conservative Party was always going to fare well in the UK election of 12 December 2019, but few thought the landslide would be as huge as it was. The victory means the UK will leave the European Union as planned on 31 January 2020, under the existing withdrawal agreement.

The pound strengthened, though it’s still at a historic low relative to the dollar, and markets reacted positively as investors welcomed greater policy clarity.

The UK has lagged behind other markets for the last three-and-a-half years.

“UK shares typically trade at around a 17% discount to their global peers,” Sue Noffke, Schroders’ head of UK equities told media in a conference call held to unpack the election results. “That discount recently reached over 35% and there could potentially be scope for this discount to close, given the greater clarity on policy provided by the election result.”

Arguably, this election outcome makes the UK stock market investable again for those who had shied away due to the previously high level of political uncertainty.

UK assets should receive a boost, according to a research note from investment firm BlackRock.

“We expect to see flows back into UK equity and credit now that some of the Brexit uncertainty has been removed. Domestic-focused UK sectors, such as construction, consumer discretionary, financials, real estate and healthcare, should outperform international counterparts.”

Financial shares on the JSE with exposure to the UK, like Investec and Old Mutual, traded upwards on the positive sentiment. So did property counters Hammerson and Capital & Counties, though Intu, which is one of the UK’s largest listed property companies and a constituent of the FTSE-100 Index, bucked the trend and is trading lower.

Investment holding company Brait, which owns New Look, Iceland Foods and has expanded Virgin Active to the UK, was also trending lower – but that has more to do with its own issues than market sentiment.

Britain’s economy will now hopefully cast off some of the Brexit uncertainty, though risks do remain.

Trade, customs, and indeed everything else regarding the UK’s future relationship with the EU still need to be negotiated. The deadline for the conclusion of these negotiations is December 2020.

“It’s worth noting that the existing withdrawal agreement has a potential two-year extension already built into it. Prime Minister Boris Johnson has declared that he will not extend beyond December 2020, but it can’t be ruled out entirely,” says Azad Zangana, Schroders’ senior European economist and strategist.

The election victory spells the end of austerity spending in the UK. Both the Conservatives and Labour promised to increase spending, though the Conservative manifesto was, well, more conservative.

Their increase in spending represents a further 0.3% on top of existing current spending by government departments, with public investment set to rise by 10%.

“Nevertheless, it does signal the end of austerity. It also spells the end of the existing fiscal rules, with the current government not intending to target a balanced budget over the parliamentary period,” says Zangana.

This stimulus won’t accelerate growth overnight. Schroders anticipates 0.8% growth in 2020 as industries work through the inventory that was built up ahead of the Brexit deadline. But households and businesses should gain the confidence to spend and begin to invest. “We expect to see growth picking up to 2.1% in 2021,” Zangana says.

Growth in demand in one of South Africa’s important trading partners would give the local economy a helpful boost.

“There are strong markets in the UK for important products from South Africa, notably wines, fruits, fruit juices, for which there is enormous demand in British supermarkets,” the UK High Commissioner to South Africa, Nigel Casey, told Daily Maverick in August.

In addition, “the UK has been a strong market for automotive exports. We’ve had integrated supply chains for a number of years. There are very few areas... chicken might be one... where there might be a clash of interests.”

He added that as the UK leaves the EU and assumes its own responsibility for setting trade policy, policymakers “will be able to assume an ambition to have a strong development focus to our trade policy.

“So we will be able to use trade policy to drive development in Africa. To help drive intra-Africa trade.”

Which is a good basis for looking to expand trade in the future, he says.

In September, Trade and Industry Minister Ebrahim Patel announced that an agreement had been reached with the SA Customs Union and the UK to roll over the European Union Economic Partnership Agreement.

This means regardless of what deal the UK finally negotiates, trade between SA and the United Kingdom will continue without any additional barriers or complexities.

This was welcomed by SA businesses engaged in trade with the UK.

Of course, neither SA nor the UK exists in a vacuum. Worries about the global growth outlook persist, and global events will influence investors’ appetite for shares and specific geographies.

In terms of interest rates, the Bank of England is expected to keep rates on hold throughout next year, due to worries about the global growth outlook. Interest rates could then be raised in 2021 if global growth picks up as anticipated.

“There have been signs of progress on a phase one trade deal between the US and China,” says Noffke. “It looks likely that existing tariffs may be reduced by 50%, and the new tariffs that would have come into force may be scrapped.”

This is positive. Perhaps 2020 will bring more certainty in global trade, which could be supportive of industrial cyclicals – those more economically sensitive stocks – across global markets as well as in the UK. BM