Investment Clock insights

How will Brexit get done?


Trevor Greetham

13 December 2019

The Conservatives won a convincing victory in the 2019 General Election with their message of “get Brexit done”. The market focus now moves on to how Boris Johnson will deliver on his promise. Brexit uncertainty will be with us for some time to come.
Market reaction
The stock market reacted positively, reflecting a drop in near-term political risk. The prices of stocks previously threatened with nationalisation went up sharply and the mid cap FTSE250 index jumped by 5% initially. The FTSE100 index also rose by more than 1%, but this was partly due to a strong finish on Wall Street, with President Trump saying a Phase I deal with China was close to completion.
In contrast, bond and currency moves have been much more muted. The markets were expecting a Conservative majority, if not one quite this big. Sterling jumped by about 2% on the 10pm exit poll, and option market volatility has dropped substantially (see chart), but the pound has given back some of its initial gains and gilt yields rose only a little overnight, reflecting on-going concerns over the economy.
What’s next
Market focus will now shift to how Boris Johnson gets Brexit done. We see three possible scenarios. 
He may press ahead with a basic free trade agreement by December 2020, accepting the economic damage this would cause if he wants to diverge from European rules;
He may tack back to the centre and agree a softer Brexit by December 2020, knowing he doesn’t need backing from the European Research Group faction within his party;
He could extend the transition period to negotiate a more comprehensive Free Trade Agreement, despite a manifesto promise to the contrary.
The size of the Conservative majority means any of these options is possible and markets will respond to developments over 2020 as and when the position becomes clearer.
What we’re doing in multi asset funds
We have been overweight equities in our multi asset funds all year but with exposure tilted away from the underperforming UK market. We covered over half of our UK underweight ahead of the election, ensuring we were fully exposed to the mid cap sector. We also moved slightly overweight sterling and maintained an underweight in government bonds. 
Our next moves are likely to be driven by global events. We expect monetary easing in 2019 to lead to a pickup in global growth in 2020 with the Investment Clock model that guides our asset allocation moving well into Recovery (see below) and President Trump focusing increasingly on November’s Presidential election. As a result, we are likely to add further to our overweight in equities either on better economic data or on short-term dips in the market.
Chart: Sterling volatility based on the pricing of 3 month options on the GBP-USD exchange rate

The Conservatives won a convincing victory in the 2019 General Election with their message of “get Brexit done”. The market focus now moves on to how Boris Johnson will deliver on his promise. Brexit uncertainty will be with us for some time to come.

Market reaction

The stock market reacted positively, reflecting a drop in near-term political risk. The prices of stocks previously threatened with nationalisation went up sharply and the mid cap FTSE250 index jumped by 5% initially. The FTSE100 index also rose by more than 1%, but this was partly due to a strong finish on Wall Street, with President Trump saying a Phase I deal with China was close to completion.

In contrast, bond and currency moves have been much more muted. The markets were expecting a Conservative majority, if not one quite this big. Sterling jumped by about 2% on the 10pm exit poll, and option market volatility has dropped substantially (see chart), but the pound has given back some of its initial gains and gilt yields rose only a little overnight, reflecting on-going concerns over the economy.

What’s next

Market focus will now shift to how Boris Johnson gets Brexit done. We see three possible scenarios. 

He may press ahead with a basic free trade agreement by December 2020, accepting the economic damage this would cause if he wants to diverge from European rules;

He may tack back to the centre and agree a softer Brexit by December 2020, knowing he doesn’t need backing from the European Research Group faction within his party;

He could extend the transition period to negotiate a more comprehensive Free Trade Agreement, despite a manifesto promise to the contrary.

The size of the Conservative majority means any of these options is possible and markets will respond to developments over 2020 as and when the position becomes clearer.

What we’re doing in multi asset funds

We have been overweight equities in our multi asset funds all year but with exposure tilted away from the underperforming UK market. We covered over half of our UK underweight ahead of the election, ensuring we were fully exposed to the mid cap sector. We also moved slightly overweight sterling and maintained an underweight in government bonds. 

Our next moves are likely to be driven by global events. We expect monetary easing in 2019 to lead to a pickup in global growth in 2020 with the Investment Clock model that guides our asset allocation moving well into Recovery (see below) and President Trump focusing increasingly on November’s Presidential election. As a result, we are likely to add further to our overweight in equities either on better economic data or on short-term dips in the market.

Chart: Sterling volatility based on the pricing of 3 month options on the GBP-USD exchange rate

Source: Bloomberg as at 13 December 2019

The Investment Clock: In Recovery

Source: RLAM. For illustrative purposes only

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.