A Year After Brexit, Stock Investors Calm Before U.K. Vote

Why the U.K. is Heading to the Polls… Again

After a year of watching political shocks stir markets on both sides of the Atlantic, from the Brexit vote to President Donald Trump’s victory, investors are anticipating that Britain’s general election next month will pass peacefully, leaving intact a five-week rally in U.K. stocks.

With polls showing clear -- albeit narrowing -- margins of victory for Prime Minister Theresa May’s Conservative Party, the June 8 vote is leaving money managers with little room for doubt. This allows them to trade on the fairly steady U.K. economy, solid company earnings and optimism over growth in Europe after the centrist Emmanuel Macron was elected French president. Even persistent uncertainty over the terms of Brexit -- the campaign’s primary focus -- has failed to disrupt a rally in U.K. markets.

The FTSE 250 Index of mid-caps climbed to a record-high close on Thursday. Even a stronger pound, which reduces overseas earnings in sterling terms, has not stopped the more global FTSE 100 from hugging its all-time high set earlier this month. The U.K. currency has gained about 4 percent versus the dollar this year.

While the Conservatives are maintaining their lead in polls, it narrowed in the most recent YouGov/Times poll conducted after the Manchester terror attack.

Here’s a roundup of investors’ views on the election and U.K. stocks: 

Coutts & Co.

“The idea of a fresh five-year term for Theresa May will make the difficult Brexit negotiations a little easier,” said Alan Higgins, chief investment officer at Coutts & Co. in London, which oversees 17.8 billion pounds ($23.1 billion). “She could maybe get a clean one- or two-year transitional arrangement before striking a final deal during this five-year term.”

Higgins said the equity market “can live with a modestly positive sterling. We have a modest tilt toward the FTSE 250 relative to the FTSE 100. For FTSE 250 companies, the earnings delivery is much superior to the FTSE 100. It would be unusual for the U.K. economy to slow dramatically while you are having a decent global economic picture.”

While U.K. economic data have largely exceeded expectations since the Brexit vote, they have turned more mixed recently. The economy grew 0.2 percent in the first three months of the year from the prior quarter, the least in a year. 

UBS Wealth Management 

“If May gets a very large majority, it perhaps gives her a bit more scope with regards to the Brexit bill,” said Caroline Simmons, deputy head of the U.K. investment office at UBS Group AG’s wealth-management unit . She was referring to the nation’s payment to the EU upon departure. UBS Wealth prefers defensive dividends in Britain, and has gone underweight on the nation’s equities relative to euro-zone ones recently, she said.

“We see the balance of risks to earnings in the U.K. to the downside, while for the euro zone they are to the upside,” she added. “The U.K has had a fabulous tailwind from the weak sterling that’s starting to fade.”

JPMorgan Asset Management

There’s still room for Britain’s equity rally to continue, said James Illsley, a London-based fund manager at JPMorgan Asset Management, which oversaw $1.8 trillion at the end of March. Purchasing Managers’ Index readings have signaled expansion, and higher inflation is unlikely to weigh on domestic consumption much longer, he said.

“The U.K. economy remains robust,” he wrote in an email. “The U.K. equity market’s dividend yield is around 4 percent, which looks very attractive when compared to other U.K. assets.”

Seven Investment Management

“The Brexit issue seems to be really not troubling investors too much,” said Ben Kumar, a money manager in London at Seven Investment Management LLP. “What’s good for the FTSE 100 is global growth ticking along, stable oil prices and Europe, emerging markets and the U.S. growing -- all of the things we’re seeing at the moment.”

The Conservative Party “is not massively pro-business, but it doesn’t have to be in order to look pro-business relative to Jeremy Corbyn,” he said, referring to the Labour Party leader. “As Theresa May moves toward the middle ground, you get people hoping for a victory for the central political movement like we saw in France.”

While U.K. shares probably have room for further gains, euro-zone stocks are cheaper and driven by similar bullish factors, he added.

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