Weekly View - Boris did it
The Conservative party’s decisive victory in last week’s UK general elections delivered the biggest Conservative majority in over three decades. UK equities surged alongside the pound as investors welcomed the Corbyn defeat and possible relief from the Brexit gridlock. Johnson’s “Get Brexit done” campaign platform clearly resonated with Brexit-weary voters. We take this as a long-term positive development for UK and European equities, reinforcing our positive view on equities in both regions. In the short-to-mid-term the risk of a no-deal Brexit will likely reappear before the December 2020 transition deadline. Meanwhile, the SNP’s landslide victory in Scotland makes a second Scottish independence referendum increasingly likely. We will be monitoring both situations in 2020.
In the same week, tangible progress was made on the second major unknown markets have been contending with besides Brexit: US-China trade relations. After months of start and stop discussions, an initial “phase one” agreement was announced on Friday. The additional tariffs on USD 156bn of Chinese imports that were scheduled to take effect on Sunday were called off while existing tariffs on USD 120bn of Chinese goods will be halved to 7.5%. US stocks touched record highs on the news although whether China can comply with its end of the deal within WTO rules is questionable. Meanwhile, the Fed and other central banks should continue to keep monetary policy on hold, as expected, all of which bodes well for the further extension of the current cycle.
The week after Saudi Arabia successfully lobbied for further Opec+ oil production cuts, the oil nation celebrated the long-anticipated IPO of its state-owned oil producer Saudi Aramco. On its second day of trading Saudi Aramco’s market cap reached USD 2 trillion after its shares shot up 10%, making it not only the most valuable public company (worth more than the next five largest oil companies combined) but also propelling the Saudi Arabian equity market to seventh largest in the world, overshadowing India, Germany and Canada. We remain positive on the energy sector and believe these developments could be positive for quality cyclicals as well.