Tories on course for victory but equities benefit limited, JP Morgan says
Updated : 13:31
A Conservative victory followed by Britain leaving the EU in January 2020 is the most likely outcome of the election but the effect on UK equities will be limited, according to JP Morgan.
A Tory victory would be likely to strengthen corporate, consumer and housing sentiment, the bank said. Clarity on Brexit, at least in the short term, would also help pull investment out of its trough, JP Morgan added.
The Conservatives' steady lead of about 10% in opinion polls should give Boris Johnson a parliamentary majority of 40-50 seats, the bank said. The most likely scenario for Brexit after a Tory victory is for the UK to seek more negotiating time on a trade deal beyond December 2020.
That option has a 40% probability compared with 30% for a trade relationship being struck in time. Leaving with no deal is 25% likely and the chance of a second Brexit referendum is only 5%.
UK equities are likely to have a short-term bounce after a Tory victory but they are unlikely to outperform other regions. UK shares are not under-owned and a potential jump in the value of the pound and bond yields would be headwinds for equities, JP Morgan said.
Domestic UK stocks are more attractive than exporters because UK-focused companies will benefit from a rising pound. However they are only about 20% of the overall UK market so strong performance will not do much to boost UK indices.
Sunil Garg, JP Morgan's head of international equity research, wrote: "This week’s elections will decide whether this lack of business confidence persists or inflects. Even in the case of a Conservative majority parliament (which is our base case), unknowns associated with trade negotiations make the UK’s prospects challenging - discussions are already morphing into probabilities associated with Brexit scenarios for end 2020.
"For now, markets appear optimistic, reflected in a stronger currency. Our stance on UK Equities remains UW (although prefer domestic exposures) with Europe as a favoured play post UK elections."