Headlines that might surprise investors in 2020

The outlook for the UK stock market remains incredibly foggy in the run-up to this year’s general election. Most global investors continue to regard the UK as an uninvestible market, as they have since the EU referendum in 2016.

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Could 2020 be the year when the fog finally lifts and the UK’s respectability as an investment destination is at least partially restored? There are two main paths to this: either a clear Conservative majority which leads to a swift passing of the Withdrawal Bill early in the New Year, leading to the UK’s exit from the EU; or a less decisive electoral outcome which eventually results in some form of Labour/LibDem/SNP coalition, which then negotiates a new (softer) Brexit deal and potentially puts this to a second referendum.

The second path could be longer and more winding, but both could lead to a second set of surprises: Could the UK be the best-performing G7 economy in 2020? Both parties are promising a big fiscal stimulus, business investment (which has been held back by prolonged political uncertainty) could rebound strongly and consumer spending could accelerate as confidence is restored, employment remains high and real wages continue to rise, the latter aided by a stronger pound putting a dampener on inflationary pressures. The third consequence would be a big rotation in the sectors driving the UK stock market.

Domestic sectors such as banks, housebuilders and retailers have underperformed global, dollar-earning multinationals by a huge amount since 2016 and remain very lowly valued by historical standards. A rising pound, stronger UK GDP and potentially even some modest increases in interest rates could see a sharp reversal in this trend.

Of course, a less clear-cut electoral outcome is also possible, the consequences of which are harder to predict. But it could lead to leadership changes at the top of both main political parties, perhaps a radical realignment of British politics with a strong centrist force emerging out of the chaos, and almost certainly at least one more election or referendum in 2020. A further bout of such uncertainty could push the UK into recession, although the cynic might argue that more political bedlam wouldn’t come as much surprise to anyone these days!

Outside of the big (and quite binary) consequences of the election, two other topics are likely to attract a lot of headlines. Our clients are focusing ever more intensely on ESG concerns (and climate change in particular) and the scrutiny of sectors such as Oil & Gas and Mining, in particular, will become more focused and more unforgiving. With these sectors accounting for some 26% of the FTSE 100 index, this could become a bigger issue for UK markets than elsewhere and management teams may have to ponder more radical strategic change to convince ever more sceptical investors. Finally, M&A activity is likely to remain high, especially so if political uncertainty persists and the spread of valuations between loved and unloved remains as high as it is currently.

Steve Davies December 2019

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