By Peter Evans
LONDON--A surprisingly strong showing by the Conservatives in
the U.K.'s national election spurred a sharp rally in stock markets
early Friday, as British companies and their shareholders embraced
the prospect of a Tory win.
Industries as diverse as retail, defense, shipping, gambling and
tobacco all rose strongly in London trading as businesses prepared
for five more years of a Conservative-led government. The FTSE 100
index surged 1.8%, with the Stoxx Europe 600, Germany's DAX and
France's CAC 40 also showing strong gains.
The biggest winners were businesses faced with the threat of new
policies under a Labour government. Foxtons Group PLC, the upmarket
London real estate agency, climbed as much 10% on news that Labour
plans for a tax on homes worth more than GBP2 million ($3.04
million)--known as the mansion tax--wouldn't be implemented.
Likewise, tobacco manufacturers and gambling companies--both the
subjects of proposed Labour restrictions--rose strongly.
Shares in U.K. utilities Centrica PLC and SSE PLC soared on news
of a Conservative victory. Power companies had been under threat
for two years by a pledge from Labour leader Ed Miliband to cap
energy prices. Centrica rose almost 10%, while SSE PLC was up
6%.
But the honeymoon period for U.K. companies may be a short one
as a new political uncertainty looms, centered on an age-old
British debate: its relationship with Europe.
David Cameron--who is almost certain to remain British prime
minister--has promised to renegotiate the terms of the U.K.'s
membership in the European Union and has guaranteed an in-out
referendum by 2017, despite his support for continued membership.
The levels of uncertainty surrounding a potential EU exit--or
"Brexit"--would far dwarf the fears felt by British business
leaders in the run up to the Scottish independence referendum last
year.
Analysts said the sheen of the Conservative victory could soon
wear off as politicians and company executives turn to the prospect
of a battle over the U.K.'s place in Europe.
"This does now open the U.K. to a period of uncertainty in the
run-up to any vote," said David Tinsley, an economist at UBS. "It
is certainly possible this negativity impacts investment decisions,
inward investment and the broader demand for assets over the next
few years."
Already, companies with big European operations were shrugging
off some of the election gains. Consumer-products giant Unilever
PLC, which makes around 17% of its sales in the EU, was broadly
flat. Rival Reckitt Benckiser Group PLC, with around 22% of sales
in the EU, also lagged behind the broader market.
Diageo PLC, which relies on trade agreements to export its
whiskey, vodka and rum brands throughout the EU, showed only meager
gains. "We strongly believe we would like to see the U.K. in the
EU--our industry benefits from it enormously," Diageo Chief
Executive Ivan Menezes said in an interview last year with The Wall
Street Journal.
Diageo, the world's biggest producer of Scotch whisky, is also
likely to be affected by the swift rise of the separatist Scottish
National Party, which may force any new government to rework
Scotland's relationship with the rest of the U.K.
But such worries appeared a long way off for most companies on
Friday.
Tesco PLC and J Sainsbury PLC both got big lifts on the
Conservative victory. The Labour Party had pledged to push through
a rise in the minimum wage to GBP8 an hour from GBP6.50, which
could have pressured margins at retailers.
"Anything that helps with employment costs is good for us," said
Sainsbury CEO Mike Coupe at a meeting with reporters earlier this
week.
Stocks in defense-equipment makers were among the biggest
winners, with shares in BAE Systems PLC, the country's largest arms
maker, rising as much as 4%. Uncertainty over the election outcome
weighed on share prices in the run-up to the polls.
The Conservative Party has promised to back the construction of
four new submarines to carry the country's nuclear weapons. BAE
Systems, Rolls-Royce Holdings PLC and Babcock International Group
PLC are among the companies already working on the submarine's
design, though a decision on whether the proceed with the project
isn't due until next year. Buying four new submarines would cost up
to GBP16.4 billion, according to a parliamentary report.
The U.K.'s shipping industry also looked like a big winner. Mr.
Cameron is widely expected to maintain the so-called nondomicile
tax rule that allows wealthy shipowners and others to limit the tax
paid in the U.K. Labour had promised to scrap the rule. Industry
experts say one in three owners relocated outside the U.K. in the
wake of tightening of nondom benefits in 2008 and 2011.
Write to Peter Evans at peter.evans@wsj.com
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