By Josie Cox, Ewen Chew and Rebecca Howard
U.K. markets rallied Friday as Prime Minister David Cameron's
Conservative Party looked on track to win the U.K. election with a
slim parliamentary majority after drawing far stronger support than
expected, the British Broadcasting Corp. projected.
The British pound rose 1.5% to $1.5486, according to CQG.
Earlier it reached $1.5521, a level last seen in February, from
$1.5243 before exit polls late Thursday.
London's FTSE 100--the benchmark equity index of the country's
largest companies--was 1.6% higher, spurring gains on the
pan-European index.
Shares in banks, utilities and construction companies got a big
boost. Economists said that some of the policies of the main
opposition Labour Party had been perceived as potentially negative
for those sectors.
Shares in Royal Bank of Scotland Group PLC, Lloyds Banking Group
PLC and Barclays PLC were all trading between 4% and 7% higher by
midmorning, while utility Centrica PLC was up over 7%, making it
one of the biggest gainers on the index.
In debt markets, moves were more muted, with the yield on the
10-year U.K. government bond, or gilt, falling around 0.06
percentage point to 1.87%. Yields fall as bond prices rise.
The Conservatives' strong showing is a far cry from the dead
heat predicted in months of pre-election surveys, which could have
spelled weeks of uncertainty around the country's political
future.
"This result is far less complicated than the markets' worst
fears," said Bill O'Neill, head of the U.K. investment office at
UBS Wealth Management, which has $668 billion in assets under
management.
"With certainty will come a renewed confidence from investors in
a more stable and transparent policy climate."
Simon Gergel, chief investment officer for U.K. equities at
Allianz Global Investors, said that this outcome is therefore good
news for the markets.
"Instead of Fallout Friday, today could turn into Frenzied
Friday," he said.
The FTSE 100 and the FTSE 250 index of midcap
companies--traditionally more exposed to the domestic economy and
therefore particularly vulnerable to political jitters--were
resilient in the lead-up to the vote.
So far this year, the FTSE 100 is 6.5% higher. The FTSE 250 is
up 11.5% in 2015, thanks to a near 3% gain Friday.
Some strategists and investors cautioned that a government led
by Mr. Cameron could hurt sterling in the longer term because of
his pledge to hold a referendum on whether Britain should stay in
the European Union.
Phyllis Papadavid, senior global currency strategist at BNP
Paribas, agreed that the "referendum risk" would "haunt the
currency at a later stage," but others brushed off those
concerns.
"The prospects of a referendum on EU membership shouldn't rattle
markets, " said Brian Jacobsen, a chief portfolio strategist at
Wells Fargo Asset Management, which oversees approximately $500
billion in assets.
"It is highly unlikely a so-called Brexit--Britain leaving the
EU--will occur," he added. "Membership has its privileges and those
would be costly to give up."
Write to Josie Cox at josie.cox@wsj.com
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