Are UK markets heading for a ‘Boris Bounce’?

    10 December 2019

    Are UK markets heading for a ‘Boris Bounce’ if the Conservatives win the election?     That is the clear expectation of Goldman Sachs which last week suggested that there was $150 billion (£115 billion) worth of investment poised to be poured into Britain in the event of a Conservative government succeeding in bringing a close to the uncertainty over Brexit.      The company’s analysts have made several bullish statements on the UK in recent weeks, suggesting that UK shares could be among the best performers in 2020.

    A clear Conservative victory would, of course, also eliminate the threat of a very left wing Labour government taking over in the near future – finishing off the prospect of a sharp rise in corporation tax, wholesale nationalisation and of John McDonnell seizing 10 percent of company shares in order to consign them to a fund for the workers.      Given the deleterious effect on business from these frontline Labour proposals it would be somewhat odd if UK markets did not rise sharply on Friday morning – assuming, of course, that the polls turn out to be right and Boris Johnson does emerge as the victor.     The main question, given that there has never been a time during this election campaign that Labour has seriously looked like winning, or even being in a position to form a viable minority government, is how much of this is already priced into the markets.

    But then markets can be capricious things.   The FTSE plunged the day after Britain voted to leave the EU in June 2016, only to bounce back swiftly.   Indeed, it surged past levels they had been in advance of the referendum, when it looked as if Remain was going to win.     Even if the FTSE does bounce on Friday morning, there is no guarantee that it will be sustained.   The threat of Corbyn and McDonnell eliminated, investors might start to worry about other things, such as the ongoing trade war between the US and China, as well as the possibility that the UK will fail to complete a free trade deal with the EU by the end of next year, when transitional arrangements end.     And of course, investors might start to take a different view of equity values elsewhere in the world.   If global markets suffer a reversal, they are going to drag down UK markets with them, regardless of how much the CEOs of UK-based companies are doing cartwheels celebrating the end of the prospect of Corbyn and McDonnell.

    Should we, then, take Goldman Sachs’ word for it?   The most obvious test of its wisdom is to go back and see what it forecast for this year.     In January its chief global equities strategist, Peter Oppenheimer, said:    “It’s still our view that we’re not headed for recession in any of the major economies…  We don’t see a recession, but we do see a pretty sharp slowdown.”

    For once, that is a prediction that seems on the button.     At the beginning of 2019 it looked as if Germany, Britain and indeed the US could be headed for recession.   In the event, it didn’t happen.    Growth might be bumping along the bottom, but crucially we avoided the two quarters of negative growth which would have qualified officially as a recession.      Not that this means, needless to say, that Goldman will get it right next year.

    Just as major economies narrowly avoided recession, stock markets narrowly avoided falling into official bear market territory last year – as they had done on several previous occasions in recent years.   The 2010s seem destined to go down as the decade when various negative events looked likely to happen but in the end never quite did:  recessions, market collapses, collapse of the Euro and even – so far – a messy departure of Britain from the EU.   That is not going to make it a great decade to read about in the history books, but it has saved us all quite a bit of pain.