Date: Thurs, 26 December 2019
Author: By, Bloomberg
STERLING'S sensational news on UK election night may set the rules for the following year. The pound was at its worst week in two years against the US dollar on Friday.
An election night rally, where attendees were hopeful for a clearer political vision, was soon left looking over-enthusiastic as Prime Minister Boris Johnson solidified his Brexit rhetoric. On top of this, international events contributed to the dampening of hopes – enthusiasm for "phase one" of a US-China trade deal turned to concern over a lack of detail.
December's pattern could represent the outlook of sterling in the upcoming year according to Andrew Milligan, head of global strategy at Aberdeen Standard Investments, with the market facing further jolts in the pound. "Brexit risk has been reduced; it has by no means disappeared. Complex negotiations lie ahead. Valuations and positioning are helpful, the economic momentum is understandably weak but should recover into 2020."
While UK was voting, the announcement of the initial trade deal between the US and China which helped to rekindle risk appetite on global markets. The leap eliminated a major global risk factor and such conditions could serve additional support for UK assets.
Developing international confidence could aid fund flows, especially from Wall Street's long-established record-breaking run.
"The greater the evidence that the world economy is improving, and companies can generate positive profit growth, then markets outside the US should benefit from investors looking for cheap cyclical assets," argued Mr Milligan. "Markets like certainty. A Conservative majority gives increased insight on some of the more existential worries," said Chris Jeffery, head of rates and inflation at Legal & General Investment Management (LGIM). The standpoint for monetary policy at the Bank of England will be primary and most likely to be refined next year after its next governor, Andrew Bailey replaces Mark Carney.
For Aberdeen's Mr Milligan, "The objective is to take the emotion out of decision-making and focus on the key factors like valuations, investor positioning, macro-economic, corporate and monetary trends." That drive investors toward other asset classes, after the pound's lead role in the market reaction to Brexit. "The UK stock and credit markets are certainly much more interesting to consider after the election result," Mr Milligan noted.
London's domestically-focused equities index, the FTSE 250, hit a record high after election, in high volume. The FTSE 100, home to a range of multinationals, is up by around 13 per cent for the year. The definitive lifting of the prospect of the left-wing policies of the Labour opposition party could also increase incoming capital flows.
For Mr Jeffery of LGIM, international factors also look more definitive for gilts. "Donald Trump and Xi Jinping probably have more impact on the pricing of UK debt than Boris Johnson and Jeremy Corbyn," he said, referring to the Labour leader. For the pound, investors have experience of pricing the chances of reaching a no-deal Brexit.
Russell Silberston, a portfolio manager at Investec Asset Management, said the December 2020 cliff edge "could actually be good news" for the clarity it provides, at least for UK business. BLOOMBERG
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