LONDON – The Conservatives have won a slim but clear majority to govern the UK over the next five years, surprising markets that were bracing for a hung parliament as forecasted. The result sent equities, bonds and the British pound surging.
The pound sterling rallied overnight more than 1.5 percent against the dollar and by around 2 percent versus the euro.
“The upside potential from here for sterling is, in our view, limited, but importantly the risk of a lurch lower in the pound is also less likely as financial markets are reassured by continuity and the prospect of further fiscal consolidation,” commented Alan Wilde, head of fixed income at Baring Asset Management.
UK gilts have also rallied following several days of free fall. In the aftermath of Cameron’s re-election, 10-year gilt yields have fallen 1.67 percent to about 1.92 percent.
Meanwhile, the FTSE 100 Index is up by more than 2 percent today, at the time of writing, to around 7025 points. Dominic Rossi, global chief investment officer of equities at Fidelity Worldwide Investment, said he expects the FTSE 100 to continue climbing after reaching a record high of more than 7,000 points in April.
The year-to-date chart below—the iShares MSCI United Kingdom ETF (EWU | B-92) in blue and the CurrencyShares British Pound Sterling Trust (FXB | B-99) in black—clearly shows in the case of both securities the April rally that took the FTSE 100 to a record in April, the pullback ahead of the election and, not least, the post-election relief rally.
Chart courtesy of StockCharts.com
A Short-Lived Rally?
Financial consultancy and advisory group deVere’s founder and chief executive, Nigel Green, said the relief rally might fade when investors realize a Conservative win could result in an EU referendum within the next few years, and investors need to be prepared against a fall in the value of their UK assets.
“With many UK investors lacking geographical diversification, favoring a home bias, this should be a wake-up call to start a much-needed rebalancing to increase their exposure to international stocks, bonds and maybe property,” he said. “Now is certainly the time to think more globally.”
The fall of nationalist party UKIP today somewhat diminishes the risk of an EU referendum, however. UKIP leader Nigel Farage announced his resignation this morning as he failed to secure his own constituency of Thanet South.
Shaun Port, chief investment officer of ETF-focused discretionary wealth manager Nutmeg, said the biggest gainers are stocks where a Labour-led coalition would have set policies that would curb profits, in areas like housing and utilities.
“For this year, global economic trends will prove more significant for UK markets,” Port concluded.