The outcome of the 2019 general election lit a fire beneath the London Stock Exchange. Momentum flowed out of the Labour Party and into transport and utility stocks, which had been vulnerable to nationalisation under the opposition’s plans. Equities rallied in response to the certainty of Brexit and the ‘stonking’ Tory majority.
Three years of People’s Vote rallies and parliamentary gridlock have restrained UK equity growth, with investors unwilling to invest without certainty over the country’s relationship with the European Union. Businesses such as engineering holdings company Goodwin (GDWN) have lashed out at UK politicians for precipitating the delay of hard-won orders. They are optimistic for 2020.
Brexit is now certain, but it is not done. George Lagarias, chief economist at Mazars, highlights the probability of agreeing a UK-EU trade deal as a long-term threat to investors. The relationship will not be easy. Furthermore, there are matters of post-Brexit Britain's relationship with President Trump, its rising deficits and the rocky state of the Union. “Investors have better be patient, take their gains where they find them, and only make long-term bets when visibility over the future is somewhat clearer,” Mr Lagarias warns. We do not know what “Boris unbound” looks like, he adds.
An unmuzzled Boris will be at liberty to make a series of changes to public services, however. A Labour majority, or even a minority government, was considered unlikely before the election. But National Express (NEX) and FirstGroup (FGP) shares bounced following the election result as the threat of prime minister Corbyn’s transport reforms disappeared. Mr Johnson could enact reforms over transport workers’ rights regarding their ability to strike, for example. “The overwhelming rejection of Corbyn's brand of Marxism certainly gives the government a mandate to do this,” write Peel Hunt analysts.
National Grid (NG) and Pennon (PNN) bounced, too, as the prospect of utilities nationalisation evaporated. Housebuilders, including Persimmon (PSN) and Taylor Wimpey (TW), also jumped, with delayed commercial projects expected to kick on while a more stable political landscape encourages investment inflows.
This stability may also facilitate the listing of new companies. In 2017 there were 81 initial public offerings. This fell to 68 in 2018. But by the end of the third quarter of 2019 there had been only 19 London IPOs. African Export-Import Bank postponed a $250m (£192m) London listing in October, citing “unfavourable market conditions”.
Maltese private plane company AirX Charter, meanwhile, did not follow through with its intention to list in 2019. “There could be an uptick in new issues fairly early in 2020,” says Dan Nickols, head of UK small and mid-cap equities at Merian Global Investors, “as issuers look to take advantage of improved sentiment and demand for UK equities”.
The same rationale applies to the potential for takeovers in 2020. The stock exchange’s smaller constituents could be on the receiving end of a flurry of interest. Ken Wotton, co-manager of the Gresham House UK Micro Cap Fund and Multi Cap Income Fund, believes that improved corporate visibility and healthier investor sentiment could push up “currently underweight allocations to UK small caps during 2020”.
“As asset allocations improve these valuation discounts could quickly unwind, positively impacting small and micro-cap company share prices,” he adds. “Already elevated levels of small-cap takeover activity could also increase as more larger corporates and private equity funds target undervalued UK assets.”
