By Tommy Stubbington And Josie Cox
U.K. markets welcomed Prime Minister David Cameron's clear
election victory after concerns that a potentially lengthy
coalition-building process might lead to market volatility.
The British pound, stocks and government bonds rallied Friday as
it became clear Mr. Cameron's Conservatives had won the U.K.
election and the right to govern alone.
"For the past few weeks the watchword on the U.K. election was
uncertainty," said Simon Gergel, chief investment officer for U.K.
equities at Allianz Global Investors, which oversees billion EUR412
billion of assets. Markets woke up Friday to "a lot more certainty
than most people expected," he said.
Still, investors cautioned the rally could be short lived.
By the close of Friday's trade, U.K. stock markets had been
eclipsed by a broader rally across Europe. U.K. government bonds,
meanwhile, gave up much of their early gains.
Beyond the first-day bounce, "there's little reason for further
momentum, " said Jeremy Batstone-Carr, chief economist and
strategist at London-based brokerage and wealth manager Charles
Stanley, which has around GBP20 billion of assets under management.
The firm continues to prefer eurozone and Japanese stocks, which
are being fueled by massive central bank stimulus, he said.
Some investors said Friday's relief was further tempered by a
more distant prospect: Mr. Cameron has promised voters a referendum
on the U.K.'s membership in the European Union, which they worry
could lead to potential political instability.
"An EU referendum is all but guaranteed now, giving an
additional layer of uncertainty to the outlook," said Bill O'Neill,
head of the U.K. investment office at UBS Wealth Management, which
manages around $2 trillion of assets.
Late Thursday, investors' initial relief was felt in currency
markets. Ahead of the vote, opinion polls had consistently pointed
to deadlock, predicting that neither the Conservatives nor the main
opposition Labour Party would able to govern alone. But sterling
leapt in a sudden flurry of trading after an exit poll at 10 p.m.
U.K. time pointed to a firmer-than-expected victory for Mr.
Cameron.
Trading in sterling against the euro and the U.S. dollar between
10 p.m. Thursday and 8.30 am Friday clocked in at three to four
times the recent average volume, according to Barclays.
The pound touched a 10-week high of $1.5523 during Friday
trading, before dropping back to around $1.5457 in late trading in
London, up 1.3% from late Thursday.
Stocks joined the rally from their open and gathered momentum
during the day. The flagship FTSE 100 index closed 2.3% higher. The
Stoxx Europe 600 advanced 2.9%. U.K. gains were concentrated in
sectors such as banks, utilities, and housebuilders, which are seen
as most at risk from more-interventionist regulation promised by a
Labour-led government. Gas provider Centrica surged 8.1%, Royal
Bank of Scotland Group climbed 6.1%, and property developer Barratt
Developments closed 7.1% higher.
Smaller companies, which earn a much bigger chunk of their
revenue inside the U.K., fared even better. The FTSE 250 index of
midsize firms climbed 2.6%.
Rob Jones, co-head of European equities at Swiss bank Union
Bancaire Privee, which has $107.6 billion of assets, said the
outcome was encouraging him to look for buying opportunities in the
U.K. stock market.
"The result makes it more likely the U.K. will sustain levels of
economic growth and should provide some boost to overall consumer
sentiment," he said.
Britain was the fastest-growing nation in 2014 among the Group
of Seven advanced economies, but stumbled during the first quarter
of 2015.
But for many money managers, the election has been a sideshow.
The U.K. was caught up in a stormy global fixed-income selloff over
the past week that had little to do with domestic politics.
Friday's debt market moves were small by comparison. Ten-year
yields on U.K. government bonds, known as gilts, fell slightly to
1.88%. That was roughly in line with the move in yields on German
bonds, known as Bunds, which have led the way in the recent
selloff. Yields fall as prices rise.
"Even if you had known before the election exactly what the
result was going to be, it would have been tough to know how to
trade it," said Mike Riddell, a bond portfolio manager at M&G
investments, which oversees GBP257.3 billion. "Everyone's been
looking at the Bund."
Write to Tommy Stubbington at tommy.stubbington@wsj.com and
Josie Cox at josie.cox@wsj.com
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