U.K. Markets Rally on Election Results--7th Update

By Josie Cox 

U.K. markets rallied Friday after Prime Minister David Cameron's Conservative Party swept to victory in the U.K. election, drawing far stronger support than expected after a historically close election campaign.

The British pound was trading 1% higher early in the afternoon at $1.541 having reached $1.552 earlier in the day--a level last seen in late February.

London's FTSE 100--the benchmark equity index of the country's largest companies--was trading around 1.8% higher, spurring gains on the pan-European index.

Shares in banks, utilities and construction companies got a particularly big boost, with economists saying that some of the policies of the main opposition Labour Party had been perceived as potentially negative for those sectors.

Royal Bank of Scotland Group PLC, Lloyds Banking Group PLC and Barclays PLC were all trading between 4% and 7% higher by early afternoon, while utility Centrica PLC was up nearly 8%, making it one of the biggest gainers on the index.

U.K. government bonds, or gilts, rallied briefly, with the yield on the 10-year falling around 0.10 percentage point to 1.83%, before retracing back to just above 1.93%. Yields fall as bond prices rise.

The Conservatives' strong showing was a far cry from the dead heat predicted in months of pre-election surveys, which could have spelled weeks of uncertainty around the country's political future. In fact, Mr. Cameron's majority gives him the right to govern without a coalition partner, an outcome that was widely considered unlikely.

"This result is far less complicated than the markets' worst fears," said Bill O'Neill, head of the U.K. investment office at UBS Wealth Management, which has $668 billion in assets under management. "With certainty will come a renewed confidence from investors in a more stable and transparent policy climate."

Simon Gergel, chief investment officer for U.K. equities at Allianz Global Investors, said that this outcome is therefore good news for the markets.

"Instead of Fallout Friday, today could turn into Frenzied Friday," he said.

The FTSE 100 and the FTSE 250 index of midcap companies--traditionally more exposed to the domestic economy and therefore particularly vulnerable to political jitters--had been resilient in the lead up to the vote, but some had warned that a so-called hung parliament, where no single party wins an overall majority, would exert pressure on stocks as well as sterling.

So far this year, the FTSE 100 is 6.9% higher. The FTSE 250 is up 11.5% in 2015, thanks to a 2.8% gain Friday. Recent swings in global stocks, however, mean that the FTSE 100 is just 0.7% higher and the FTSE 250 is up 2.6% from last Friday's close.

Rob Jones, co-head of European equities at UBP, said the outcome was encouraging him to look for buying opportunities in the U.K. stock market.

"The result makes it more likely the U.K. will sustain levels of economic growth and should provide some boost to overall consumer sentiment," he said.

Britain was the fastest-growing nation in 2014 among the Group of Seven advanced economies, but stumbled during the first quarter of 2015.

Still, some strategists and investors cautioned Friday that a government led by Mr. Cameron may hurt markets in the longer term because of his pledge to hold a referendum on whether Britain should stay in the European Union.

Phyllis Papadavid, senior global currency strategist at BNP Paribas, said that the "referendum risk" would "haunt the currency at a later stage" while Alberto Gallo, head of macro credit research at Royal Bank of Scotland, said that it could "give pause to overseas investors, and potentially lessen capital inflows" into the U.K.

Invesco Perpetual veteran Neil Woodford, head of investment at Woodford Investment Management, also struck a more cautious tone.

"A less conclusive result would clearly have been worse for the economy because of the associated political uncertainty, but our assessment of the U.K. economy suggests we should expect modest growth at best over the next few years," he wrote in a note.

"[The election] certainly doesn't remove all of the political uncertainty."

Write to Josie Cox at [e-mail]

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