The market has rallied after the Conservative party performed much better than expected in yesterday’s general election, with prime minister Boris Johnson being handed a significant majority. 
While there were concerns ahead of the election that it would result in another hung parliament, the Conservatives ended up with a majority of 80 – giving them their biggest majority since Margaret Thatcher's 1987 election victory.
Sterling jumped to its highest level against US dollar since May 2018 while the FTSE 250 – home to many companies geared to the domestic economy – was up around 4 per cent shortly after the market opened this morning.
The FTSE 100, which tends to have an inverse relationship with the pound given its large number of overseas earners, initially opened with a slight fall but moved into positive territory as trading started in earnest.
Investors were buoyed by the Conservative victory for two main reasons: the likelihood that Johnson will be able to take the UK out of the EU and the avoidance of a hard-left government under Labour’s Jeremy Corbyn.
Sterling vs US dollar
Source: Bloomberg, BBC
Helal Miah, investment research analyst at The Share Centre, said: “As has been the case over the last three-and-a-half years, the best barometer of progress for the financial markets has been sterling and its near 3 per cent reaction at 10pm last night signals a great deal of relief for many reasons, most of which removes uncertainty.
“Markets are comfortable in knowing that Brexit will happen, deadlocks in parliament have been removed and the fear of a business unfriendly hard-left government. However, the stock market’s reaction is far more mixed.”
Nigel Green, chief executive and founder of deVere Group, has a bullish outlook on what happens next for UK assets – predicting sterling to soar to $1.40 and the economy to be boosted by billions of pent-up business investment being unleashed.
“Boris Johnson’s election gamble has paid off,” he said. “Christmas has come early for the pound, the British economy and UK financial assets.”
Analysts at investment bank Jefferies said a number of UK companies are clear winners from the Conservative majority, especially in sectors such as utilities, banks, builders and retail. The 22 stocks they expect to benefit the most can be seen in the table below.
Most positively impacted stocks in a clear Tory majority
Source: Jefferies, FactSet
In addition, the investment bank identified the stocks that could be most negatively impacted by the election result, with names in the consumer staples and global industrials spaces standing out.
Included on this list are the likes of BAE Systems, Intercontinental Hotel Group, Imperial Brands, National Express, Primary Health Properties and Rentokil.
Finally, Jefferies said that investors who don’t like the names on its list of election beneficiaries should consider buying UK value.
“The UK is cheap (circa 12.5 per cent discount to Europe versus 3.5 per cent 20-year average) and will re-rate on the back of this outcome, in our view. Since June 2019, the FTSE price/earnings has already moved 9 per cent higher in lock-step with Boris Johnson’s progress in the polls,” it said.
“We identify 14 UK buy-rated stocks that are cheap versus European peers and sit over one standard deviation below their five-year averages. Top of our list are Cineworld, Kingfisher, OneSavings Bank, Aviva, ABF and Centrica.”
However, fund managers are warning that the early rally in UK assets might not persist over the long run as the actual mechanics of how the country will leave the EU return to the spotlight.
John Husselbee, head of multi asset at Liontrust Asset Management, said: “The initial market reaction will likely be a reversal of the moves since the EU referendum: a stronger pound, a recovery in domestic industries and, considering the proposed fiscal spend, potentially higher gilt yields.
“The relief rally may be short lived, however, as the prime minister and his cabinet start to negotiate a trade agreement, with the possibility of a hard Brexit still among the options.”
David Zahn, head of European fixed income at Franklin Templeton, is another expecting a short-lived rally as investors look past the landslide Conservative win and start to think about what comes next.
He noted that once the withdrawal agreement passes parliament, negotiations about the future trading agreement between the UK and the EU will begin, which is likely to take an extended period and will cover several sticking points, such as fishing rights.
“If the UK government wants to extend the negotiation period, it needs to make a request by the summer. That really compresses the timetable to just four or five months in which to calculate whether there is a viable trade deal,” he said.
“If there are no signs of early breakthroughs, we’d expect the markets to start wondering whether a damaging no-deal Brexit is back on the cards. Markets are likely to start reflecting more uncertainty if there are no signs of progress by the start of the summer.”