With the Conservative Party regaining power, the world’s eyes turned to Brexit and how the new government will handle its impending exit from the European Union.
According to Paras Anand, Fidelity’s head of asset management, Asia Pacific, investors need to pay close attention to the result due to fiscal policy, contrarian signals on inflation and the strength of the British pound.
The Tory’s victory will likely see the government leave the European Union and change the outlook on inflation despite inflation measures showing signs of an uptick across world markets, Mr Anand said.
“Give the number of ‘false alarms’ over inflationary upticks in recent years, it is likely that central banks will position themselves behind the curve, which could, in sharp contrast to consensus, lead to inflation overshooting on the upside over the medium term,” Mr Anand said.
Quentin Fitzsimmons, fixed income portfolio manager at T.Rowe Price, believes the new government will mean rates are unlikely to be cut.
“The fact that a no‑deal Brexit is off the table in the near term reduces the likelihood of the Bank of England cutting interest rates anytime soon.
“As such, UK government bond yields are likely to remain range‑bound for the time being, although they may fall if there are increased concerns over a global recession,” Mr Fitzsimmons said.
Mr Anand also said the strength of the pound is one to watch as the US dollar continues to be supported by a tighter stance to monetary policy.
“First, as the immediate rally in the pound suggests, this could be another signal that the long period of US dollar outperformance in the context of currency markets is coming to an end,” said Mr Anand.
Finally, the fund manager believes England is likely to rally through infrastructure and healthcare policies following a Conservative victory.
“Johnson, in particular, has a track record of supporting investment in larger-scale infrastructure projects. This aligns with a global trend we expect to continue in the coming months, one of the government’s finding recourse in fiscal policy rather than monetary policy to support economic growth,” Mr Anand said.
“While these campaigns are clearly focused on supporting domestic growth, it is important for investors to consider the cumulative impact of this global shift in economic strategy,” Mr Anand continued.
“At first glance, the outcome of a snap election in the UK should have little bearing for global markets. But considered in the context of what could prove to be more meaningful turning points in economic policy and market leadership, investors would do well to pay closer attention,” Mr Anand concluded.
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