There will have been a huge sigh of relief across Britain’s boardrooms following Boris Johnson’s election victory.
Businesses, especially big businesses, were extremely nervous about the Labour Party’s plans, if elected, to seize 10% of the equity of every company with more than 250 employees to place in a central fund.
Ostensibly, this was to give workers a stake in the business for which they work, but was seen as a stealth tax raid on corporate profits – and it sent a terrible message to international investors considering where to deploy their capital.
So, too, did Labour’s proposal to nationalise the water and energy industries and Royal Mail – and those concerns intensified when, shortly after the publication of Labour’s manifesto, John McDonnell, the Shadow Chancellor, unexpectedly announced plans to nationalise Openreach, directly breaking a promise he had made to its owner, BT, that it would be left alone.
All of those things deterred international investors from the UK stock market and meant that the market has underperformed its international peers during recent years.
Now that those clouds have lifted and the UK has the prospect of stable government for the first time in nearly three years, it is expected that confidence and investment will begin to return.
Richard Buxton, head of UK equities at Merian Global Investors and one of the most influential fund managers in the City, said: “I expect to see business confidence respond positively to this new set of political realities, which should in turn be genuinely positive for the UK economy.
“The next Budget, which is expected to be announced in February, is likely to be loose in terms of fiscal spending and therefore stimulatory in terms of economic terms.
“I expect consumer confidence – remarkably resilient in recent years notwithstanding all the uncertainty- to strengthen significantly.”
That was borne out when the UK equity market opened this morning.
The FTSE 100 fell at the open, which was to be expected, following the pound’s strong gains overnight against the US dollar and the euro following publication of the Sky/BBC/ITV exit poll showing a clear Conservative majority.
The Footsie is dominated by global companies that make a significant proportion of their earnings in dollars and euros.
Those earnings translate into lower sterling-denominated earnings when the pound is higher – and, accordingly, some of the big blue-chips have fallen.
However, as the trading day has gone on, the Footsie too has risen as the pound has slightly come off the boil.
Among the most eye-catching gainers among the blue chips have been some of the big banks.
In several cases, notably Lloyds and RBS, these are a big play on the UK economy and their shares have been in demand.
More significant than the FTSE 100 has been the reaction of the more domestically-focused stocks mid-cap index, the FTSE 250.
It rose by 4% at the open to hit an all-time high – with shares of retailers and housebuilders among some of the main gainers.
One of the more noteworthy has been Pendragon, the UK’s largest motor dealer, a stock which has been bombed out during the last 12 months.
John Stevenson, retail analyst at stockbroker Peel Hunt, said: “There has been a strong performance for the retail sector this morning, led by DFS, B&M, Dunelm and Dixons Carphone.
“I think we will see a surge in consumer spending coming into Christmas and the New Year.”
Investors in the gilt – UK government bond – market have also had cause for relief.
Labour’s manifesto contained spending pledges the like of which had not been proposed in this country since the war.
They implied a vast increase in government borrowing and a huge increase in the national debt.
That will not come to pass and, with the threat of a run on the pound also having listed, reduces the risk of the Bank of England being forced to raise interest rates higher than would otherwise have been the case.
That is not to say that UK government borrowing will not rise under the Conservatives.
Howard Cunningham, fixed income portfolio manager at Newton Investment Managers, said: “The problem with the Conservatives’ approach is that by ruling out any increases in the three main personal taxes, they have closed off one financing avenue if greater public spending is needed, such as for the NHS, or if pursuit of a clean break with the EU at the end of 2020 leads to further economic weakness.
“Extra borrowing would therefore be required to plug the gap, with the majority of it financed by additional gilt issuance.”
Meanwhile, although investors and boardrooms will be relieved that the threat of a hard-left Labour government has lifted, there are still numerous challenges lying in wait for the new government.
In the short term, there is the matter of securing a deal with the EU before the end of 2020, with Boris Johnson committing during the campaign not to extend the transition period beyond that.
Exporters to the EU, in particular, will be watching anxiously. So will a lot of companies in the services sector.
As Stuart Clark, portfolio manager at wealth management firm Quilter, noted: “This new found confidence could quickly fade with the realisation that the prime minister has an enormous amount of work to do to ensure that the UK does not inadvertently leave without a deal before the end of the transaction period, currently slated for the end of 2020.
“It remains to be seen whether Mr Johnson is committed to that date and a hard Brexit, or whether the strength of this victory allows him to step back from the harder right and negotiate a closer working relationship with the EU.
“This trade deal negotiation process does seem to be a risk that is ignored by markets, instead focusing on the short term, looming Brexit deadline.”
And the UK also has longer economic challenges with which to grapple.
While employment remains at an all-time high and the jobless rate at its lowest for 45 years, productivity – an improvement in which is the key essential driver of higher living standards – has flatlined for the last decade, reflecting the UK’s skills crisis.
The economy ground to a halt during the three months leading to polling day, with the UK manufacturing sector actually in recession, while business investment – a key driver of GDP growth – has flatlined during the last 18 months.
Dame Carolyn Fairbairn, director general of the CBI, summed up the challenges facing the new government: “After three years of gridlock, the Prime Minister has a clear mandate to govern.
“Businesses across the UK urge him to use it to rebuild confidence in our economy and break the cycle of uncertainty.
“Employers share the Prime Minister’s optimism for the UK and are ready to play a leading role.
“They can bring the innovation, investment and jobs for a new era of inclusive growth.
“The biggest issues of our times – from tackling climate change to reskilling the workforce for new technologies – can only be delivered through real partnership between government and business.”
To sum up, then, investors have been mightily relieved that the threat of an interventionist Labour government, which was widely perceived to be anti-business, has been lifted.
That will be good for attracting capital into UK assets.
There is also optimism that, now the UK has a degree of certainty about the Brexit timetable, businesses will once again have the confidence to invest and consumers will feel empowered to spend.
As the UK goes into 2020, though, attention will turn to the likelihood of Boris Johnson, having ruled out extending the transition period beyond the end of next year, securing a trade deal with the EU within that timetable.