UK domestic stocks surged after the Conservative Party’s election victory lifted the uncertainty that has persisted since the country voted to leave the European Union and removed concern about the Labour Party’s plans to nationalise assets.
The FTSE 250 index gained 3.4% and closed at a record high. Banks, utilities, homebuilders and retailers led gains for UK stocks, with Royal Bank of Scotland Group and Lloyds Banking Group both up at least 5.3% at the close in London. The FTSE 100’s gains were curbed by exporters falling on the pound’s strength.
“In a world starved of yield, the UK equity market is awash with compelling dividend opportunities – this decisive election result means these companies will return to the radar of international investors,” James Uphaugh, chief investment officer at Majedie Asset Management, said. “As long-term, active investors we see a number of exciting opportunities given the enticing valuations.”
But questions remain about the UK’s departure from the EU. “Enjoy the rise in UK share prices, but don’t be fooled into thinking we’ve found El Dorado,” said Jim Wood-Smith, chief investment officer, private clients at Hawksmoor Investment Management. “We have no idea what the deal will look like at the end of next year, or indeed if there will even be a deal.”
See here for more reaction from strategists and economists. Here are the UK sectors and stocks moving the most:
Domestic banks including RBS, Lloyds and Virgin Money UK soared across the board. Financial-services firms like Hargreaves Lansdown and St James’s Place also rallied.
Mediobanca SpA analysts think the result should boost commercial banking income and upgraded its ratings for Lloyds, asset manager M&G and insurer Direct Line Insurance Group. Still, Citi said that fundamentals for UK banks are still not that strong.
Deutsche Bank AG also reckons the result is a good outcome for UK insurers and may see them narrow the valuation gap to European peers.
Water firms Severn Trent and United Utilities Group, electricity grid operator National Grid and energy firm SSE all jumped. All had been targeted for nationalisation by the Labour Party.
Those companies have been recovering ground against their European peers as the chance of a Labour win receded, but the Tory majority and Jeremy Corbyn stepping down as Labour leader should now remove this risk for the sector.
Postal service group Royal Mail, telecoms operator BT Group and transport firms like FirstGroup and Go-Ahead Group, all of which have also faced a nationalisation-related threat, also rose.
BT should now get investment stimulus for its Openreach arm to build out fiber broadband across the country, according to Jefferies.
Retailers, Media and Travel
Food retailers including Tesco, J Sainsbury and Wm Morrison Supermarkets, as well as high street names like Marks & Spencer Group and Next rallied.
“A strong Tory majority should provide improved consumer sentiment, solid disposable income growth and reduced input pressures,” Jefferies analysts including James Grzinic wrote in a note. While Tesco might be the UK stock that many investors will default to, the analysts also see “merits across most other UK large-cap retailers.”
Travel operators and airlines are also surging as gains for the pound make overseas travel for Brits cheaper. HSBC analysts raised their ratings on British Airways-owner International Consolidated Airlines Group SA and Irish budget carrier Ryanair Holdings on the clearer outlook.
Broadcaster ITV, which has seen a downturn in advertising spending linked to Brexit uncertainty, rose too.
Homebuilders and property
Housebuilders including Barratt Developments, Persimmon and Taylor Wimpey all rallied at least 12% as clarity on the outlook for Brexit could boost housing transactions. Citigroup says the sector should see a “healthy” re-rating. Companies that supply housebuilders, such as Travis Perkins, also gained.
Commercial-property stocks including British Land Co., Land Securities Group and Hammerson jumped. They should benefit from the extra clarity too, as this could boost appetite for UK property assets.
UK government contractors like Capita, Serco Group, Babcock International Group, QinetiQ Group and Mitie Group all rose. The clear majority for the Tories may mean contracts start to flow to the sector, including those related to Brexit.
In addition, a Labour government was seen as more unfriendly for outsourcing stocks, RBC Capital Markets says. This will also underpin the share price gains.
The FTSE 100 rose 1.1%, buoyed by the election result and news that China and the US agreed on the text of a phase one trade deal. Some index members, including gold stocks and large exporters such as AstraZeneca and GlaxoSmithKline, fell.
The FTSE Small Capitalisation Index rose 2.2% and the AIM 100 index rose 2.2%. Both are heavily domestically exposed and will benefit from the better outlook on Brexit and the UK economy.
“The greatest share price appreciation may have come through in mid caps initially, but we expect capital to waterfall down the market capitalisation levels into small caps and micro caps going forward,” said Gervais Williams, the head of equities at Premier Miton Investors.
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