Whether you celebrated or mourned the general election result politically, stock markets reacted very positively yesterday and sent the value of your investments higher. The FTSE 100 index rose almost 80 points or 1.1% whilst the more domestically focused FTSE 250 index gained 3.44%. At one point it was up 5.2%, posting a record high. UK housebuilders soared, for example Persimmon by 12% whilst Severn Trent rose 9%.
The pound also rallied against the dollar and to its highest level against the Euro for three and a half years. Gilt prices fell meaning yields rose.
Much of the market reaction can be explained by removal of uncertainty, at least in the short term. The UK is set to leave the EU on 31 January whilst the threat of nationalisation of utility companies such as Severn Trent has been removed.
One reason why the domestically focused FTSE 250 index outperformed the globally focused FTSE 100 index was due to Sterling strength which impacts adversely on the value of repatriated overseas earnings. Gilts prices typically fall when markets perceive less risk, so investors may have rotated from gilts to equities.
So what next? Alan Collett manager of the TM Home Investor fund, the UK’s only authorised retail residential property fund thinks a “wait and see” attitude has affected the housing market and with some of the uncertainty removed, housing transactions are expected to pick up.
We may see a traditional Santa rally in the equity market for the rest of the month but of course there is still plenty of uncertainty in 2020 as the UK negotiates its future relationship with the EU. Of course global events will also impact the UK economy notably the outcome of the US/China trade talks.
Markets tend to over react and we may see a paring back of yesterday’s optimism and gains in the next month or two. There are reasons to be cheerful for investors but we shouldn’t get carried away.
This will most likely be my last blog post of the year. May I take this opportunity to wish you all a very happy Christmas and New Year.
The content of this blog is intended as general investment information and commentary only. Nothing in this article should be construed as personal investment advice, for example to invest in equities or property. You should seek individual advice based on your own financial circumstances before making investment decisions.