Limited growth is in store for London's blue-chip stocks index as Prime Minister Boris Johnson, who promises to "unleash Britain's potential" and "get Brexit done", is leading in polls for the election on Dec. 12, investors said.
Britain's top stock index is expected to reach 7,500 points by the end of 2020, about 1.4% higher than Monday's close, according to a Reuters poll of 22 fund managers, investors and analysts taken in the past two weeks. The rise is broadly in line with what is expected for the euro zone's Euro STOXX 50.
Globally, the longest bull market in history is predicted to keep on going, albeit at a slower speed than in the past 10 years, thanks notably to expectations China and the United States avert a full-blown trade war.
Since the 2016 vote to leave the European Union, British stocks as a whole have severely underperformed the world in dollar terms as investors continued to cautiously steer clear of Brexit-sensitive shares.
Sterling and UK domestic stocks have nevertheless jumped in the past month as betting markets and opinion polls fuelled hopes the incumbent Conservative Party would secure a majority, put an end to short-term political uncertainty and prevent Labour from implementing a perceived far-left agenda, including nationalisations.
An increase in government spending in the Tory manifesto is also expected to give an extra boost to the economy and help prop up domestic-focused stocks. But because the majority of the FTSE 100 constituents earn their revenues abroad in foreign currencies, they have missed out on some of the improvement in sentiment towards Britain PLC.
Moreover, the rise in the pound constitutes an accounting burden and weighs on their valuations. Anyhow, analysts argue most of the potential positive news for UK markets has already been priced in after asset managers from across the world rushed to increase the UK/Brexit exposure of their portfolios.
"Assuming a Conservative victory, I would also assume a moderate rally over a limited number of sessions - at best; but that's all", said Ken Odeluga, market analyst at City Index. Political risk, as it turns out, won't simply go away.
Even if Boris Johnson renews his Downing Street lease and gets Parliament to approve his Brexit deal, "we face the prospect of a new, albeit rather less dramatic, cliff edge", Rupert Thompson, head of research at asset management group Kingswood wrote in note on Monday.
Britain needs to negotiate a trade deal and agree on its future relationship with the EU in 2020. A failure to do so or to extend the so-called transition period could lead to a potentially damaging and disorderly exit of the EU and trigger yet another scare on UK assets.