The markets reacted enthusiastically to the result of the British elections. Faced with the prospect of a Parliament dangerously in the balance, David Cameron's Tories surprisingly prevailed, triggering a flurry of resignations among the defeated parties, primarily Ed Miliband's Labor Party. The removal of uncertainty and the prospect of maintaining the status quo supported purchases.
“Contrary to almost all expectations – he commented Bill Street, Head of Investments EMEA at State Street Global Advisors – the Conservative party won the elections in the UK. The market reaction so far shows both surprise and relief as the election result removes all short-term political uncertainty in one fell swoop.
IN THE SHORT TERM THE UNCERTAINTY IS ELIMINATED
For markets, this result means not only the removal of political uncertainty in the near term, but also a continuation of fiscal consolidation and pro-business governance. “Stocks – said Bill Street – will probably be the main beneficiary of this electoral result. So far this year the FTSE has underperformed Europe (excluding the UK) in local currency terms by over 13% and we could see the gap narrowing.' Utilities and construction, for example, did particularly well on Friday as the threat of more regulation was removed. The rebound effect should lead the UK to do better than Europe. Among the best-positioned sectors, he points out Barclays, those most closely associated with pre-election uncertainty: utilities, banks, insurance companies, defense companies.
On the currency markets, experts do not expect drastic movements as happened in 2010. "In the 2010 elections - he always pointed out Bill Street of State Street Global Advisors – we saw a weakening of the pound against the dollar on election day, followed by a subsequent appreciation. This time it was different and only a small amount of the uncertainty premium appears to have been pre-priced by the market.
THE REFERENDUM ON THE EURO IS SHAKING THE MARKETS
The overwhelming victory of the Tories can also be explained by the pro-market policies put in place by Cameron which have found several supporters in the business world, such as the Italian Stefano Pessina, CEO of the pharmaceutical distribution giant Walgreens Boots Alliance. But the prospect of the United Kingdom leaving the European Union shakes the sleep of many bankers, especially international ones, as in the case of HSBC which has already warned of the risks associated with this move and has announced that it is considering moving its headquarters outside the country.
“In economic terms – write the Morgan Stanley analysts – we expect the austerity fiscal policy to continue and a less interventionist government than we would have had under the Labor administration. But now we also expect the Referendum on remaining or not in the Union and probably some negative implications for investments”. Yet David Cameron does not ease the pressure: he immediately confirmed, already in his opening speech for the second term, the referendum on the European Union.
“Europe is facing the worrying prospect of a British government that has promised its electorate to hold a referendum on whether the country remains in the European Union by 2017,” said Neil Dwane, Chief Investment Officer Equity Europe at Allianz Global Investors commenting on the result of the British elections. “We therefore expect – he added – that the European Union, and in particular Germany, will begin to emphasize the advantages of the United Kingdom belonging to Europe, despite the fact that it has not joined the single currency”. Among British citizens there is a certain Euroscepticism, as evidenced by the votes in favor of the UK Independence Party exceeding 10%, but there is also a significant part of the electorate willing to remain in Europe.
THE IMPLICATIONS FOR INVESTMENT
At an operational level, it should therefore be borne in mind that in a longer-term perspective as 2017 approaches, Street also noted, “all sterling-denominated assets will become sensitive to the forthcoming referendum and there could be temporary nervousness internationally”. Traders therefore hope that these issues will be tackled over the next 18 months through a constructive and cooperative dialogue between Westminster and Brussels. the initial easing of the markets could be followed by a downward reaction.
Even government bonds, which on the short-maturity front enjoyed some support with the election result, could require a certain degree of caution when moving to longer maturities. “The divisions within the British Conservative Party and the possibility of new referendums on Europe and on Scottish independence - also pointed out Howard Cunningham, bond manager of Newton (Bny Mellon group) - threaten the political stability of Great Britain in the medium term. We therefore suggest a certain degree of caution when investing in long-dated gilts; returns will be influenced by domestic but also global factors, such as interest rate trends in the US and the outcome of Greek debt negotiations”.
