13 December 2019
On the face of it, what looks like a good night for Boris Johnson could be painted as an historic event in the future of Europe and potentially for the United Kingdom. But does winning a strong majority for the Conservative Party (if exit polls are to be believed) mean much for global markets in 2020 and beyond? In my view, there are three areas that investors should focus on.
First, as the immediate rally in the pound suggests, this could be another signal that the long period of US dollar outperformance in the context of currency markets is coming to an end. Uncertainly over Brexit has led to a long period of sterling weakness in particular - but the US dollar has also been supported by America’s tighter stance towards monetary policy and stronger underlying economy relative to rest of the world. Weaker economic data over recent months and an uncertain political outlook has led to the Fed coming under pressure to keep monetary policy loose. This serves to support the economy but also the stock market, which appears to be seen by US President Donald Trump as a referendum on his performance as leader. The dollar also looks stretched to us from a valuation perspective. If we are indeed at a tipping point in the dollar’s long outperformance this will have meaningful consequences for global markets, and in particular emerging markets. While global markets have performed well in recent years led by strong US equity markets, emerging markets have been more volatile.
Second, it is likely that, Brexit aside, this Conservative victory in the UK will represent things coming full circle from David Cameron’s defeat of the Labour Party in 2010, when he largely ran on a campaign of austerity. By contrast, all parties in the current campaign cycle have talked about the need for more spending on areas such as healthcare. Johnson, in particular, has a track record of supporting investment in larger scale infrastructure projects. This aligns with a global trend we expect to continue in the coming months, one of government’s finding recourse in fiscal policy rather than monetary policy to support economic growth. Indeed, over the last week, we have seen the announcement of a meaningful new program of spending in Japan. While these campaigns are clearly focused on supporting domestic growth, it is important for investors to consider the cumulative impact of this global shift in economic strategy.
Third, both of the above points - and arguably the process of Brexit itself - could spell a change in the outlook for inflation. We have seen a number of inflation measures move higher over the past year, but when we look at bond markets across the world, it would be fair to say that a pick-up in inflation is being accorded a very low probability at current prices. Give the number of ‘false alarms’ over inflationary upticks in recent years, it is likely that central banks will position themselves behind the curve, which could, in sharp contrast to consensus, lead to inflation overshooting on the upside over the medium term.
At first glance, the outcome of a snap election in the UK should have little bearing for global markets. But considered in the context of what could prove to be more meaningful turning points in economic policy and market leadership, investors would do well to pay closer attention.
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.