Tomorrow, UK voters head back to the polls for the fourth time in five years. On Tuesday, the pound fell 0.8% from its intra-session highs after a closely watched model tracking the election suggested Prime Minister Boris Johnson’s lead had narrowed in recent weeks. A YouGov poll model pointed to a 28 seat Conservative margin, down from 68 two weeks ago. That followed a model from Focalpoint, which showed the Conservative party winning 24 seats, down from their forecast for 82 in November.
As things stand, Boris Johnson's Conservative Party still appears on course to win a majority of seats in this election, which would enable the prime minister to deliver on his promise to "Get Brexit Done". But, as with any vote, it is too early to draw conclusions as a turnout rates, tactical voting, and shifting party allegiances (not to mention the famous British weather) could all yet influence the final result. We see the following scenarios as the most likely outcomes:
- Sterling has strengthened against the USD in recent sessions as expectations of a Conservative victory have grown. In our view, if UK voters award the Conservatives a majority we expect this trend to continue, with GBPUSD trading as high as 1.35. In the equity market, this result is likely to favor sectors and stocks with a higher exposure to the domestic economy.
- If Johnson's Conservatives are denied a majority, then a hung parliament with his party as the largest group in the House of Commons is likely and we would enter a period of uncertainty until the next government is formed. This will likely lead to some short-term volatility for the pound but we expect this to be relatively contained. In the scenario of a hung parliament we expect the pound to range-trade (GBPUSD 1.25-1.30) until the path for Brexit becomes clearer.
Our view on sterling remains bullish. In the near-term, sterling’s direction will clearly be dictated by the election result. Longer-term we consider the pound undervalued and likely to add positive total returns to investor portfolios over time. We have underscored our longer-term commitment to it by not hedging our strategic exposure to UK equities.
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