The winners from the Boris bounce: domestically focused shares and investment trusts soar

The reaction from markets to the landslide victory for the Conservative Party has been broadly favourable for two reasons: the risk of a Corbyn-led Labour government has disappeared, while the strength of the Tories in Parliament now gives more clarity around Brexit. The Conservative Party have won 364 seats (with one seat left to declare at time of writing), giving them an estimated majority of 78, their largest since 1987.

Soon after the exit poll suggested a Tory win, the pound started to rally against both the euro and the dollar. Sterling now stands at a 19-month high, at £1 to $1.34, as at 10.15am. That brings the pound slightly above previous 2019 highs, when it reached $1.33 in March. Against the euro, the pound stands at £1 to €1.20.

The victory for the Conservatives has been welcomed by certain stock sectors. The most obvious sector to rally was UK utility stocks, which had previously been punished by markets due the threat of nationalisation under a Labour government.

In early trading, energy supplier SSE had gained around 9.5%, while Centrica (which owns British Gas) was up roughly 7.4%. Water company Seven Trent gained over 7.8% while Pennon’s share price went up by over 7.7%. Royal Mail also saw a recovery, with its share price, up by almost 6%. 

UK domestic stocks in general, however, saw a strong uplift, with the FTSE 250 gaining around 4.5%. Housebuilders did particularly well, with Persimmon up by over 10% and Barratt Developments up by over 12%.

The FTSE 100 was up by 1.5%. The blue chip index often struggles when the pound goes up owing to the bulk of the earnings of listed companies coming from abroad.

Investment trusts with large exposure to UK domestic small and mid cap stocks also saw strong gains. Temple Bar saw gains of around 6%, while Fidelity Special Values gained by around 3%. BlackRock Smaller Companies was up over 4% while BlackRock Throgmorton gained around 5.5%.  

Aberforth Smaller Companies Trust went up by around 5.8%, as did Schroder UK Mid Cap. Henderson Smaller Companies saw even better performance, gaining 8.55%.

Silvia Dall’Angelo, senior economist at Hermes Investment Management, says that the election removes uncertainty surrounding the divorce aspect of the Brexit process, which should be good news for the short-term economic outlook of the UK.

He says: “Growth has slowed down significantly over the last few years, largely reflecting the drag from Brexit-related uncertainty on business investment. As the fog of uncertainty partially lifts, growth and business investment will probably experience a modest pick-up in the first half of next year.”

Phil Smeaton, chief investment officer at Sanlam UK, makes a similar point, noting that the result removes uncertainty. This will “free businesses to unleash a surge in investment, [while] consumers should once more feel confident enough to spend their well-deserved wage gains.”

Dall’Angelo, however, warns that Brexit is still far from settled. He notes: “Once the EU withdrawal agreement is approved – which is now almost certain to happen by the end of January – the uncertainty about the end point of the journey will linger and the path to it will likely be bumpy and lengthy.”

Similarly, Steve Bell, chief economist at BMO Global Asset Management, says: “it is not one leap and we are free. The result removes the uncertainty over Brexit getting done, but the country now faces a new set of challenges as we enter an intensive period of negotiations over our future trading relationship with Europe.”

But with the prospect of a Corbyn-led Labour government gone, Smeaton says: “Investors in the UK can relax as their taxes remain unchanged, and global investors are likely to feel comfortable enough to commit capital to one of the world’s cheaper equity markets.”