UK Markets Will Move Onto EU Referendum

Terry Flanagan

Colin Morton, portfolio manager in the Franklin UK equity team, said financial markets will quickly get over the euphoria of the election result and begin to focus on issues such as whether the UK leaves the European Union.

The Conservative party unexpectedly won last Thursday’s UK election with enough votes to hold a small majority in the House of Commons, despite all the opinion polls predicting there would be either another coalition or an unstable minority government.

Morton said in a note that the outlook is fairly optimistic after a definite result and a pro-business party in government.

“When markets get over the initial euphoria of the result—which on the face of it seems better than expected—there are still plenty of issues to focus on over the next six to 18 months,” he added.

The fund manager said mid-cap stocks in sectors most affected by politics – house builders, real estate companies, utilities, tobacco companies and support services – are likely winners from the election result.

“Many large-cap stocks aren’t really impacted by the political affiliation of the government, namely oil companies, pharmaceuticals and mining companies,” said Morton. “It didn’t matter that much to them whether it was going to be the Conservatives or the opposition centre-left Labour Party.”

Morton said some large-cap sectors will also benefit such as tobacco and banking, where the Labour Party had discussed windfall taxes, and utility companies, as Labour had proposed to freeze energy prices.

Prime Minister David Cameron was elected on a policy of continued cuts in government spending but the anti-austerity Scottish National Party won 56 out of 59 seats in Scotland. In addition, Cameron promised to hold a referendum by 2017 on whether the UK should continue being a member of the European Union.

“I think a possible UK exit from the EU is something that would concern the market, but it’s not likely to be an immediate concern,” added Morton. “Knowing how markets work, they will probably start worrying about a possible British exit, or “Brexit,” around the middle of next year.”

Alan Higgins, UK chief investment officer for Coutts, the UK private bank, said in a note that UK equities had responded positively to election results with small- and mid-cap stocks leading the way, as well as certain sectors including financials, utilities and housebuilders.

Higgins said: “As we noted back in April, our study of 11 previous elections found that UK equities tended to rally back during and after election periods, having sold-off beforehand. So far, this pattern seems to be repeating itself, and we expect UK equities to remain strong as overseas investors are attracted to a well-valued market.”

Mike Amey, portfolio manager in Pimco’s London office responsible for sterling portfolios, said in a blog that the UK economy looks set to sustain real growth of between 2.5% and 3% over 2015 as inflation is below the 2% Bank of England target and wage growth is outstripping inflation.

“So far, the UK’s enthusiasm for EU membership seems to be dominated by the outlook for the eurozone,” Amey added. “Given improving prospects for the eurozone, the threat of the EU referendum should not derail the UK recovery. The rally in UK assets makes sense.”

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