The Week: Better times for the UK market?

With the election looming, the UK markets appear to be pricing in a Conservative victory and fund managers are increasingly optimistic, but is there enthusiasm misplaced?


  • The outcome of the UK election still looks uncertain with the Conservative lead over Labour narrowing.
  • The UK economy has stagnated, with construction and industrial production particularly weak.
  • Investment trust managers believe the UK will produce the best stock market return in 2020.

At the time of writing, the outcome of the UK election still looks uncertain. The Conservative lead over Labour has narrowed over the course of the election campaign. While few believe that a majority Labour government is likely, a Labour-led coalition remains a possibility. 

The stakes feel high for investment markets and the investment industry. There can be little doubt that if the Labour manifesto were to be implemented in full, it would be bad news for the UK stock market and for the savings industry more generally. Higher taxes and reduced incentives for saving would almost certainly reduce the flow of money into investment funds.

At the same time, the UK economy has stagnated, with construction and industrial production particularly weak. The consumer is currently supporting the economy, but even here, there are signs of weakness. Wage growth remains high and the Christmas season will be an important indicator of strength.  

Nevertheless, in spite of this uninspiring backdrop a recent poll by the Association of Investment Companies (AIC) shows that investment trust managers believe the UK will produce the best stock market return in 2020. A third of respondents (33%) feel the country has the best prospects for the coming year. This was ahead of Asia Pacific ex. Japan (19%) and Europe and the US, which received just 10% of the votes each.

Over half (52%) believe the UK market will rise, with just 14% expecting a fall. 38% of fund managers think the index will end 2020 between 7,500 and 8,000, with a further 24% opting for a more optimistic 8,000 to 8,500. 

However, it is difficult to see this optimism being sustained in the face of a Corbyn-led government. The recent rally in Sterling and in UK assets has been premised on the removal of the tail-risk of a majority Labour government. Markets are no longer priced for pessimism and this brings in scope for disappointment. 

A lot rests on Thursday’s result.