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Victoria Clarke on the general election result, the next steps and what it means for the UK and businesses. 

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Jonathan Pryor (JP): Good morning to everyone.  I’m sure there are a few bleary eyed listeners this morning. There certainly are in the office after a long night.  Firstly, thank you very much to Victoria for joining us this morning.  But most importantly, thank you to all you guys for tuning in.  It was probably a bit of a surprisingly comprehensive victory last night. 


I think it took us all back, at ten o’clock, when the exit polls came out, and obviously, as the results streamed in, it pretty much followed that order.  So, we have a pretty buoyant sterling this morning and we have a lot to talk about, so we’ll get straight on to it.


We appreciate that it’s probably a very busy day for all of you guys to get your head around what’s gone on and go through your own business planning, so we’ll try and wrap this in circa 25 to 30 minutes and we’ll get straight into the core of it.  Good morning, Victoria.


Victoria Clarke (VC): Good morning. 


JP: The first place to start, and the only place to start, is to talk through the results. It would be great to hear from you about exactly how big a win is this for the Tories and how bad is this for all the other parties? 


VC: As you said, it was quite staggering when the exit poll came out at ten o’clock, because although we had hints of big Tory majority numbers coming through from some of the polls, particularly one that predicted the 2017 election very well, and that one had put an estimate of 68 as the Tory majority.


But it was that exit poll showing it just so big, at that 80 mark, that really caught everybody, investors, and probably, most of the inside of the Tory party and everywhere else in politics, right off guard.  And it’s a huge win.  It is.  That is going to give the biggest majority for the Conservatives since the days of Baroness Thatcher  in 1987.  And equally, as you say, how bad is this for everybody else? 


For Labour, it’s horrendous.  It’s Labour’s worst seat total since 1935 and it’s their first time, in the inter-war years, that Labour has won less than 200 seats.  So, it was quite something.  It really felt like, certainly, in terms of recent decades, history books in the making.  


There will be a lot of soul searching going on amongst the Tory ranks and the Labour ranks, and the Liberal Democrats, on what exactly went right for people and what went wrong.  What did drive such a strong result for the Conservative Party.  We had the Conservatives up at 364.  I think there’s one to be counted, which will probably say Tory.  


Labour down at 202, and the SNP at 48.  So, it was a really good result for the SNP and the Liberal Democrats at 11.  Decent for the SNP; poor for the Liberal Democrats.  Not in the main, but particular of note was that you had Jo Swinson, leader of the Liberal Democrats, lose her seat.


And the DUP, the deputy of the DUP, Nigel Dodds, lost his seat in  Belfast north, and there was another loss in Belfast south.  So, in addition to the big ticket story, the extent of the gains and losses, there are also some really interesting sub stories about the people that had some shock results also. 


So, it’s really interesting and that’s just the politics, without getting into what it means for Brexit or anything else.


JP: There’s a lot to take in.  As we try and take it in, it feels like markets are trying to do exactly the same. Sterling, as we’ve seen, has already been very volatile this morning, as has the FTSE.  It would be great to hear your thoughts on exactly what it means for sterling and maybe something slightly broader, in terms of the other asset classes. 


VC: As you said, sterling has enjoyed the news and we’re seeing sterling rising in the weeks up to the result, but not to the extent that it completely believed that this Conservative majority was going to be the outcome.  And what we’ve had overnight was the confirmation not only of that, but the extent of the move means that there were really no foreseen problems in Boris Johnson getting his so called oven ready Brexit deal through.  


So, that means that he’s going to get that through and we leave the EU on the 31 January, and that’s buoyed sterling because one of those big areas of uncertainty is seen as removed.  The question and the things for us, when thinking about our forecasts, is where sterling is going to go from here forward.  And I don’t think the uncertainty on Brexit is completely removed.


So, it may be, and already we’re seeing a bit of this, because sterling moved right up through 1.35 and it’s come back down a bit since, is actually, what’s the longer term plan for Brexit, because that’s just the divorce deal. So, he’s got this oven ready deal, that’s just the divorce.  Then what? Then what are the trading arrangements?         


So, we’re seeing a little bit of that in sterling, but in terms of sterling’s path going forward, there’s potentially more soul searching to come in, which could pull it a bit further down. And that’s certainly our forecast, where we see sterling coming down towards the 1.30 mark by the middle of next year, when there are those really serious questions about what happens, once the UK is trying to sort out a trading arrangement, and has transition coming to an end at the end of the year.


JP: To add to that, I think that was the sentiment from our trading desk this morning, as well, where the guys said that the majority of the good news is out there now.  So, hence, why sterling dollar goes to 1.35, quite a significant relief rally, but as Victoria said, it’s already retreated down to the low 1.34s and 1.33s.


VC: If I may, in terms of asset classes, we’ve seen bigger moves across other areas, as well.  In the fixed income space, gilt yields have moved up eight bases, and really big moves in the XT market space.  FTSE 100 was up about 1.5% when I last checked. 


FTSE 250, up 4.1%, and that’s really the realisation that you didn’t get the counterfactual, which was things like nationalisation of big utility companies. So, typically, when sterling’s rising to the extent that we’ve seen, the FTSE 100, in particular, is under pressure.


But obviously, because this was the counterfactual, some of these less business friendly labour policies, we’re also seeing big gains in equity markets. 


JP: Really positive reaction.  Is this Brexit done now?  Does this mean everything will be done and dusted by January?


VC: The divorce deal, yes, for sure.  There’s little chance that that will get derailed. So, with a majority of 80, he’ll take his oven ready Brexit deal. He’ll probably put it to a vote before Christmas, and the relevant legislation that still needs to be done gets done, and by the end of January, we are technically out of the European Union.


But then at that point, we need to move on to the next task, and arguably, the bigger task of working out how we’re going to continue to trade with the rest of the European Union on a long term basis. So, from the end of January, we’re in this transition phase, which lasts until the end of 2020. but then we need to sort out a free trading arrangement. 


And for anyone that’s looked at trading arrangements and trade deals, China and the US and the EU and Canada, they take a hell of a long time and they’re extremely complicated to do. The UK and the EU have the advantage of being on a level playing field on a number of fronts already, but it’s still going to be a huge task. Boris has said that he won’t extend the transition period and that’s in the manifesto.


If you believe that then potentially, there’s another cliff edge at the end of 2020 where if he doesn’t like what Brussels is offering him, with a majority of 80, he might say, my parliament will back me on this and there’s the threat of a move on what you might call a no deal move to WTO trading terms at that point.


So, there’s that, but also, the big majority probably makes it easier for him to throw his weight around with Brussels, because they know, if they offer him something, that he can get it through parliament.  So, it brings big threats in two directions, and it’s not clear cut which way it goes.  But this is what I’m saying, uncertainty is the theme again next year. It’s not the end of uncertainty. 


JP: This was always the Brexit election.  It would be interesting to take it away from Brexit for a second and hear your thoughts on what other big policies has Boris got up his sleeve?


VC: Everything you heard in the election campaign was get Brexit done, and that was a very conscious decision for Johnson, because as it’s turned out, it was the vote winner really.  This was the thing that he thought would bring people together, and clearly, it has, looking at the results.  So, the manifesto that they put out there is not enormous in their breadth, scope, and size of policy initiatives.


There are big things in there, but a lot of it is what they’re talking about when they were talking about the spending rounds in September, I think it was.  So, things like a lot more cash for the NHS, infrastructure spending.  And on the tax front, there were things that we heard, like National Insurance thresholds going up to 9,500, lower business rates.


So, more business friendly policy, but they’re not enormous things in the sphere of, particularly in the context of what the counterfactual would have looked like for Labour.  A big question this morning for us is whether, with such a big majority, whether he’s going to set his sights a lot higher, it would be the sensible thing to do. 


If you’ve got the biggest majority since 1987, you would expect to use that to drive a very strong political agenda and he’s potentially got five years to do that.  So, let’s say he uses this year primarily to focus on Brexit.  After that, will there be much bigger tax changes, spending adjustments?  So, we could be in for a much radical overhaul of the policy backdrop.


And obviously, we don’t know what that might exactly look like.  Because as I say, the scope of the manifesto is relatively narrow, so that could well be broadened out quite significantly.  The other thing is, we don’t exactly know how long a parliamentary term is, because one thing that was in the manifesto was the commitment to withdraw the fixed term parliament match, which sets the five year period. 


So, if they don’t manage to pull back on that, which you’d think they could do with an 80 seat majority, then they will potentially have a bit more scope to call elections as and when they want to, so that could be interesting, also. 


JP: How about more immediately?  In his triumphant speech this morning, he said, let’s get breakfast done, but what about after that and between now and Christmas?


VC: I could do with some breakfast, certainly.  But once we’ve had breakfast and Brexit out of the way, there’s the Queen’s speech to do, that’s the first thing.  So, on the 19 December, we expect the Queen’s speech to be put forward, and that is, for those who don’t know, very much the policy framework, which the government intends to deliver over its terms, so we will hear more about that. 


But we would expect that to be based on the manifesto, not on those bigger ticket policy changes, which will probably come down the line.  So, that’s next week.  As I said, there’s also an expectation that there will be a Brexit vote before Christmas, which is looking like a formality, at this point, given the numbers.  So, that’s that. Then you move into January, there’s legislation to get through. 


Then after January, things might get a bit more interesting, because the chat this morning is that it will be February, March time when we will get the budget, the long awaited budget, because we haven’t had one this year, so everyone is desperately waiting to know what tax changes are going to come through in the spring, and a bigger cabinet reshuffle.


So, there might be a small cabinet reshuffle, perhaps as soon as today, next week, but the big changes, once he’s found who his friends are, how people are supporting on Brexit, how they’re performing, then there might be much bigger cabinet changes to reflect the bigger policy changes.


So, I think the spring is an interesting period and spring is also interesting, because that’s when he’s going to really launch his negotiations with the EU over the future trading arrangements.  So, that does look to be at a critical point, and obviously, if we get a big shift in direction on future trading arrangements and on policy at that point, that could be a double whammy for sterling, once we hear that sort of news. 


JP: Final question, Victoria, before we go to a couple of questions that have already come in, it would be great to hear your thoughts about the broader implications for the UK economy.  We’ve spoken a lot about sterling, but it would be interesting to hear your thoughts around growth.  


VC: It’s been a lacklustre period for the UK economy, there’s no doubt about it.  Ever since the referendum, business investment has been suffering markedly.  We’ve also had, on top of that, the downside that’s come from the global backdrop, from the US China trade war, so that’s not helped. 


But Brexit, undoubtedly, has been a drag and it’s been bouncing the growth numbers around from quarter to quarter, depending on whether firms suddenly think that we’re about to exit the EU, like in last March, where there was a lot of stock accumulation and then the unwind of that.  


But the drag, if you strip out all that noise, is quite clear.  You can make a case that there’s a rebound to come, that one element of this business uncertainty, as we’re clearly seeing affecting the sterling this morning, gets stripped out and business investment bounces back, and firms are a big more able to add an extra unit investment, perhaps hire an extra person. 


So, those factors have been very clear.  When you look at a lot of the surveys that come through that ask the firms, what are your key concerns?  These have been very tangible things.  So, even with the divorce element done and the UK leaving the EU at the end of January, that creates a boost in itself for the UK economy.


But there is a limit there, because as I say, if you’re a footloose international investor, you still don’t know what tariffs you’re going to face, what sort of non-tariff barriers you’re going to face after the end of 2020.  So, it’s not going to be a big pick-up. 


Our growth forecasts are a bit confusing, because they look for pretty steady growth this year and next on an annual basis, but that’s just a statistical quirk.  Actually, it’s a doubling on the quarterly growth pace next year, so it is more positive.


JP: Leading on to the questions we’ve already got in, picking up on the point around forecasts, the first question alludes to we have our sterling dollar forecast in for the end of next year at 1.35.  Do we  stand by that? 


VC: Yes, we do.  Our conditioning assumption has been that we would see a Conservative majority, and admittedly, I think we’ve all been surprised by the extent of the majority.


But in terms of where it takes us on Brexit, broadly, I think it’s in the same direction, and therefore, the underpinning assumptions for the economy and for interest rates, and the risk uncertainty element,  are very similar.


So, yes, 1.35, which as I said, given that we’ve moved through that point already this morning, raises the question why we’re not seeing a bigger move out.  There are a couple of points here.  One is that there’s still some talk about UK interest rates being lowered, and that could come from the international backdrop from the trade war, from more concerns about the phase two of the China US trade war. 


So, that might provide a bit of a dampening effect.  More fundamentally, the fact that the uncertainty over the future trading arrangements is still very, very significant in the middle of the year.  And as the deadline, which is the 1 July 2020 approaches, to extend the transition at that middle point of the year, we could actually see sterling down to 1.30, because we’re worried about a no deal Brexit.  


If the transition gets extended, which is our base case, then it rises again.  But even then, even if that trading arrangement is agreed, it’s not a move back to the same trading terms that we have as an EU member. There are going to be more non-tariff barriers, tariffs to be paid.  It’s not the same frictionless trade that businesses have been used to.  


So, you would expect that to provide a continuing dampening factor.  And the global backdrop has changed. The rate differentials between us and the Federal Reserve, who, all this time, we’ve been sitting back and Brexit has been running in the background and we haven’t been raising rates, the Federal Reserve has moved up and they’ve reduced rates a few times this year. 


But they’re still a lot above the 0.75% bank rate.  So, there are a number of factors that suggest the recovery is quite gradual. 


JP: Judging by the conversations we’ve had on the phone this morning, that is just such a key topic.  Clients are asking that with the likes of sterling dollar up at 1.34, just trying to gauge that sentiment and probably that landscape of risk, to understand what’s going to hold it back and, if anything, what may drag it lower.


And as you say, when you start to think about the transitional period and the risks associated with that, and potential rate cuts, whilst it’s immediate good news for the pound, we certainly feel like we’re not out of the woods just yet. 


VC: Precisely.  There’s plenty more to come.  


JP: The other question that is of interest here is picking up again on the transition point and a bit more detail.  The question is; how likely is the transition to be delayed?


VC: I think more likely with the bigger majority.  So, we were looking at this a few weeks ago and he’s really going to struggle to get a Brexit deal, a future trading arrangement deal, done in that time. Bearing in mind that they’re not talking about setting out the framework for the talks until March. Nothing is impossible, but that was always going to be a very tall order. 


So, now that he’s got a majority of 80, and you’ve got more scope to be able to deal with the Euro sceptic troublemakers, if you want to  call them that, the European Research Group, which might have opposed moves to push ahead with an extension, then it makes it easier for him. But when you’ve put it in your manifesto, that’s also quite a difficult thing to go back on. 


All right, we’ve seen quite a lot of manifesto pledges shifted away from that, not least, on Brexit.  But it is written there in ink in an election that was run on that Brexit ticket, which was get Brexit done. But I think the bottom line is it’s quite difficult to see that he’s going to have any other choice, if he doesn’t want a no deal.  Realistically, Boris Johnson wants a no deal, because I think he’d quite like to have the economic wins that would come with moving on to a trading arrangement, rather than a no deal arrangement.  


The only other question I’ve picked up here is as a corporate, what do you see as the major benefits of a majority Tory government?


VC: That’s a really good question.  It’s uncertainty, again.  That’s been the buzzword through the whole of last year, and I think that’s the key thing for corporates and anyone we speak to is that what we’ve got from this Tory majority is confidence that they can deliver on the oven ready Brexit deal, so that part of the uncertainty diminishes. 


That they can negotiation a future trading arrangement, and that might take a bit more time, but again, there’s now the parliamentary ability to get a Brexit deal done.  And so, we can start to move forward with these things, which as I said, from all of the economic surveys, suggests that they have been affecting those marginal decisions to invest in capital.  


We do still need a future trading arrangement.  But I think uncertainty is one critical point.  And the other thing is very much the counterfactual.  Businesses have not now got to face  shifting Corporation Tax, which would have been at a seven point rise.  And those sorts of counterfactual points would have been incredibly significant.  And that continuing to weigh in the background of people’s minds was another key factor,  nationalisation of infrastructure.  The Tory manifesto is much more pro-business.  And I would imagine, with a majority of this size, that they might move even further in that direction, as I say, when we hear more about that in the spring.


But the other thing, I suppose, is the stigma that’s come with Brexit. That’s been quite significant for UK investors.  If they’re looking or speaking to anyone overseas, and even anyone looking to cut business with a UK supplier, there has been a reluctance there.  because you don’t know what the access arrangements are going to be from a trade and non-tariff perspective.


So, there’s the stigma and there’s the functionality that comes with just removing all of those hurdles, and in the words of Boris, getting Brexit done.  So, it may not be that perfect seamless trading arrangement that we end up with, but at least there is some certainty there, which is brought in.  And coupled with the fact that this less business manifesto hasn’t come to light, that there are two very clear positives for the corporate environment.


We might even get a bit more global growth next year, particular if they sort out the US China relationship.  So, those potentials for 2020 and 2021, if there is a future trading arrangement, will be a much better year.    


JP: Victoria, thank you so much.  I think it’s been really helpful and really insightful to hear all of your views.  A quick thank you from me to everyone for logging in.  I hope it’s been useful.  If there are any further questions or thoughts, please feel free to follow up with me or your Investec contact. 


We’d love to speak to you and we’d love to support you, and make sure you are fully briefed on what’s happened overnight and what looks like will happen going forward.  My recap is that it certainly feels like it’s immediate good news for the economy, and for business, and for sterling.  


But there is clearly a lot of work to do and on the horizon, is this transitional period, which I’m sure media focus and the market’s focus will turn to quite quickly in the new year.  So, I’m sure that  2020 is going to be another interesting year for the political front.


The final thing to say is that we will be following up with a note from our economists, so please watch out for that. That will be an in-depth note, which will go through a bit of what Victoria has spoken to this morning and I’m sure a lot more.  So, please look out for that, and again, if you have any questions, please let us know.  But for now, thank you very much for joining us. Have a fantastic weekend and look forward to speaking to you soon.

Read more from Investec on the UK General Election 2019