Investors cheered the result of a Conservative UK government, pushing sterling, share and bond prices firmly higher, with the FTSE 250 equity index of domestic focused companies climbing to a record peak.
Unexpected gains for the Conservatives allayed pre- election market jitters, sparking a solid rebound in asset prices with the pound experiencing its largest one-day rise in five years against the dollar.
Investors were for now playing down the challenge facing a new government about the role of the UK in Europe and the rise of the Scottish National party.
“The odds were stacked against such a decisive outcome. This result is far less complicated than the market’s worst fears,” said Bill O’Neill, head of the UK investment office at UBS Wealth Management.
By the close of trade in London, the FTSE 100 was 160 points, or 2.3 per cent, higher at 7,046.82, led by utilities and financial stocks – sectors considered vulnerable to increased regulatory scrutiny and a higher tax burden under a Labour government.
The mid-cap FTSE 250 set a cracking pace. The index, mainly comprising domestic- orientated companies, rose to a record high of 18,161.18, before closing 2.8 per cent higher at 17,935.93.
The rally in UK stocks pushed the FTSE 100 to a 7.3 per cent gain so far this year, and in both sterling and dollar terms the market is well ahead of the S&P 500 but still trails euro-zone markets.
Ian Scott, analyst at Barclays, said: “The removal of uncertainty and the maintenance of something approaching the status quo should lead to a near-term bounce in the UK market and outperformance relative to European and global peers.’’
Referendum
However, attention was shifting to the risks posed by the Conservatives’ policy to hold a referendum on the UK’s membership of the EU and the longer-term implications for sterling and the government bond or Gilts market.
Simon Wells, analyst at HSBC, said: “The economic implications of a possible British EU exit could be far-reaching and the Bank of England may soon be turning its attention to the regulatory and financial stability implications of such a scenario.”
Meanwhile, the surge in support for the separatist SNP has renewed fears about the strength of the ties binding the UK’s two biggest components.
"If Scotland were to vote to stay in the EU but the rest of the UK were to opt to leave, pressure to break up the union could increase further," said Mr Wells.
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hallenges ahead Mr O’Neill added: “Once people acclimatise to the certain outcome eyes will immediately turn to the challenges lying ahead.”
“While the City is pro-Tory by nature, traders have been celebrating a victory for continuity as much as for the Conservatives,” said Marcus Bullus, trading director at MB Capital.
“As far as markets are concerned, it is good news,” Stanhope Capital’s chief investment officer Jonathan Bell said.
“A Conservative victory is preferable over a Labour- SNP coalition and that’s why we see sterling and UK equities higher.”
Against the euro, the pound rose 1.5 per cent to £0.7273, recovering much of the loss seen against the shared currency over the week in the run-up to the election.
The pound rose 1.4 per cent to $1.5457 against the dollar, its strongest level since late February.
The prospects for further gains may be limited. Christoph Riniker, head of strategy at Julius Baer, said: “We do not expect the defeat of Labour to bring back pound strength.
“The large SNP delegation – and the Tories’ election promise on an EU exit referendum – keep political risks elevated.”
On the capital markets, the yield on benchmark 10-year gilts fell 4.8 basis points to 1.87 per cent as investors bought back into UK government debt. – Copyright the Financial Times Limited 2015. Additional reporting: Reuters
