U.K. Stock Investors Like the Idea of a Tory Majority -- For Now

  • FTSE 350 index rises to a record ahead of June 8 vote
  • U.K. shares typically gain before predictable elections

Caution Reigns as U.S. Politics Takes Center Stage

The jury is still out on whether a solid Conservative win in next month’s U.K. general election will soften Brexit’s blow for markets. But that hasn’t stopped equities from rising on speculation of the vote outcome.

The FTSE 350 Index of U.K. stocks has climbed to fresh records four times in the past week, gaining after an initial knee-jerk slide on the day U.K. Prime Minister Theresa May announced the June 8 vote. With polls showing the Tories ahead by 20 percentage points, investors are betting Britain will have a stable government in place, with more room for May to maneuver its exit from the European Union.

Investors may be returning to the “U.K. more as they had prepared for the worst and things have not been quite so bad,” said Steve Sherman, a London-based fund manager at BNP Paribas Investment Partners, which oversees about 580 billion euros ($642 billion). “Investors dislike uncertainty and so an election that strengthens whatever party is in place is generally pleasing for investors.”

There is a long tradition of a bullish run-up to U.K. elections where a clear win for either party has been forecast, regardless of who the expected winner is, according to a note by Schroders Plc earlier this month. Stocks also mostly advance when either party manages to capture a clear majority.

The pound jumped to a six-month high versus the dollar after May announced the election last month. A strong majority means May’s government will be less exposed to the more right-wing factions within her party, lowering the risk of a “very disruptive Brexit,” Mike Amey, head of sterling portfolio management at Pacific Investment Management Co., said in a note in April.

“At the margin, a solid Tory majority makes an extreme outcome slightly less likely, but there are lots of other factors that go into that calculation,” Lars Kreckel, an equity strategist at Legal & General Investment Management Ltd. in London, said by phone.

It’s not clear what a larger Tory majority will mean for the outcome of Brexit talks. While May favors a “hard Brexit,” or loss of single-market access, markets are bullish for now because such a win will also allow her to accept a long transition period after the formal withdrawal, Anatole Kaletsky, chief economist at consultancy Gavekal Dragonomics, wrote in a May 3 note. If the election was due in 2020 as per the previous timetable, she may have refrained from doing so fearing voter backlash, he said.

Both sides have hardened their tone about the impending separation recently. The EU toughened its language in the latest draft negotiation directives and U.K. Brexit Secretary David Davis warned of a “row” and rejected key EU demands. A clear majority of Tory candidates with the most winnable seats backed Brexit, a Bloomberg News survey showed.

In the short term, bets of a strong election outcome have allowed investors to focus on the positives: better earnings across Europe and stronger U.K. economic data. A steadier pound has also boosted domestic stocks, while weighing on the global corporates that dominate the FTSE 100 Index.

“A stronger mandate will always be what the market goes for,” said Ken Odeluga, a market analyst at brokerage City Index in London. “We will not get what we want, there will be fits and starts, there will be many setbacks, but what markets are telling you is even with that, it’s going to be a lot better with a stronger government.” 

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