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Key points

  • Although Brexit uncertainty has had little impact on the U.S., it continues to weigh on the U.K. economy. Now, as the UK heads into a general election on 12 December, we consider how investors can position their portfolios for different scenarios.
  • A decisive electoral outcome in favour of the status quo would likely be most positive for market sentiment.
  • As the perceived risk of a no-deal Brexit has receded, the short-term outlook for UK assets has improved — but ongoing uncertainty over Brexit, alongside global trade concerns, presents challenges.

The United Kingdom (UK) will head to the polls on December 12th in hopes of breaking the parliamentary deadlock over its departure from the European Union (EU). In October, the EU granted the UK a Brexit “flextension” until January 31, 2020, with the possibility of leaving sooner if terms of exit are passed by the U.K. Parliament. Brexit uncertainty continues to be a key driver of the U.K. economy, and the result of December’s general election will have profound effects on how and when Brexit may take place.

Amid this uncertainty, we consider how investors can position their portfolios for different outcomes.

The economic backdrop

Sterling has proven the most reactive asset to UK headlines; indeed, its short-term volatility has now overtaken that of emerging market currencies. An outcome that resolves the current impasse in favor of the status quo is seen as most favorable for the currency, while an outcome that prolongs Brexit uncertainty may cause it to weaken. Sterling looks cheap on a fundamental level; with the near-term outlook unclear, investors may consider currency hedging strategies.

As the perceived risk of a no-deal Brexit has receded, market sentiment has turned more positive. This is reflected in flows into U.K.-exposed assets and European equities: After an absence of buying for much of the year, European equity flows have picked back up since September, with investors allocating around $5.9 billion1. Nevertheless, economic uncertainty persists. The Bank of England (BoE) downgraded its growth forecast in November, reflecting ongoing Brexit uncertainty and global trade tensions.

While the UK growth slowdown shows signs of bottoming out, our in-house Growth GPS is tracking below consensus: this points to room for growth data to surprise negatively, given muted business investment and a global manufacturing slowdown.

Rebound of Euro sentiment

Chart: Rebound of Euro sentiment

Source: Markit, Blackrock, as of November 26, 2019.

We set out the following broad scenarios for the general election outcome:

1. More stable outcome: Conservative majority government
The UK leaves the EU with PM Boris Johnson’s deal by 31 January 2020. A decisive outcome may boost sterling and domestic UK stocks; the perception of lower political risk would favor broad European equities. Less Brexit uncertainty may reduce some pressure on the BoE’s dovish stance.

2. Less stable outcome: Hung parliament leading to a coalition or minority government. In the latter case, the largest party without a majority enters into an unofficial agreement with one or more other parties in order to get legislation through the House of Commons, or the largest party forms a government with no majority. In that case, the path of all legislation is uncertain and such governments are typically unstable and not long-lasting. Bottom line: These outcomes would likely lead to either a Brexit delay, second referendum, or the U.K. leaving the EU with a modified deal or no deal by January 31, 2020. A less decisive outcome may increase sterling volatility; if the pound falls, large cap UK stocks may receive a relative boost. The perceived continuation of political risk may drive investors towards perceived safe haven exposures.


Upside (Scenario 1)Downside (Scenarios 2)
Potential implementation for U.S. investors U.K. equities Long duration U.S. Treasuries
Broad developed market equities Gold and diversified commodities
Eurozone equities Minimum volatility strategies
Christopher Dhanraj
Head of iShares Investment Strategy
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