Global equities rallied strongly over the month. UK stocks outperformed as the General Election delivered a sizeable majority for the Conservative Party. For the first time in a number of years the ruling party has a clear mandate to deliver on its policy objectives. On Brexit the result improves the chances of a successful negotiation as negotiations will not be held hostage by narrow special-interest groups. Investors responded positively with both Sterling and UK equities rallying.
The short-term outlook for the UK is uncertain. Recent economic data has been downbeat and a few members of the Bank of England’s monetary policy committee have called for a reduction in interest rates. However, we believe the UK economy will surprise positively over the next twelve months. The latest economic releases fail to capture the impact of the election, which we think will result in improved consumer and business confidence as well as a more expansionary fiscal policy. If this materialises, we expect Sterling to appreciate and small and mid-cap stocks to outperform. The UK market remains cheap by international standards and we would expect that discount to narrow as confidence returns. Of course, the UK economy will be heavily influenced by what happens to the global economy. In this regard the proposed ‘stage one’ trade agreement between the US and China is a positive.
In Europe there were signs of stabilisation in the economic data. Inflation remains subdued so monetary policy will remain highly accommodative. Easier fiscal policy will be less of a tailwind than in the UK, but the prolonged slump in manufacturing activity allied to domestic political uncertainty may encourage Germany to stimulate more aggressively than consensus expects. Nonetheless, European growth is likely to remain anemic. The US economy continues to be robust.