Via Financial Times

UK stocks have roared higher for the second day with Boris Johnson’s election victory helping to alleviate uncertainty that has weighed heavily on markets this year. 

London’s benchmark FTSE 100 index rallied 2.3 per cent in mid-morning trade — the biggest gain since April 2018 — bringing its rise for the past two trading days to 3.5 per cent. The FTSE 250, which tracks medium-sized British companies that tend to be more exposed to the domestic economy, advanced 1 per cent after its 3.4 per cent surge on Friday.

The gains came amid a strong day for European equities overall, with the continent-wide Stoxx 600 up 1 per cent. 

Goldman Sachs said it was particularly bullish on UK domestic stocks, especially homebuilders and banks that have struggled recently. It last week reiterated its call to bet on British-focused groups against a basket of international equities. 

“Clarity on the UK’s terms of exit from the EU should unlock pent-up business investment; the reversal of a decade of fiscal consolidation should provide a fillip to domestic demand; and a pick-up in global growth should underpin a recovery in net exports,” the bank said in a note to clients. 

Line chart of Rebased showing Medium-size UK listed groups outpace their larger peers

Jefferies analysts added that “the spectre of politics has left many UK assets significantly undervalued versus peers”. It specifically pointed to lender Barclays, housebuilder Persimmon and telecoms group BT as three of its favourites. 

In a sign of how much the political jitters have disrupted the economy, a key survey from IHS Markit released on Monday showed UK manufacturing output shrank in December at its most rapid pace in more than seven years. 

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Sterling rose as high as $1.3422 in early London dealings on Monday, an advance of nearly 0.75 per cent from where the currency ended last week. The rally cooled later in the morning, however, to leave the currency up just 0.1 per cent. It had soared to a peak of $1.3514 after it became clear on Thursday that Mr Johnson’s Conservatives would command a strong majority in the House of Commons. 

Foreign currency analysts struck an upbeat tone at the weekend as they had more time to assess the implications of the election that is expected to clear a path for Mr Johnson to push through his plans on Brexit and fiscal policy

‘Surge in domestic investment’

Goldman told clients late on Sunday that it remains “constructive” on sterling even considering the recent gains. It said investors, who had been “significantly underweight” on UK assets in comparison with other holdings, would “at least reduce that underweight as the possibility of a ‘no deal’ exit fades”. 

Stephen Gallo, European head of FX strategy at BMO Capital Markets, noted that “recent UK political developments will lead to a short-term ‘surge’ in domestic investment, economic confidence and foreign interest in GBP assets.”

However, he is more pessimistic over the next three to six months, with “relative pessimism on the global growth outlook and the UK’s transition out of the EU’s regulatory orbit” weighing on his forecast.

Line chart of $ per £ showing Sterling rallies in late 2019

Barclays warned that “we expect the pound’s gains to be contained as a number of Brexit uncertainties remain, likely restraining below $1.40 and 80p [against the euro]”.

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The bank reminded clients that the UK faces the potential for a “cliff-edge exit” from the EU late next year if Mr Johnson is unable to negotiate a Brexit pact with the bloc. 

“In particular, we think the Conservatives are unlikely to seek an extension before the 1 July 2020 deadline to request one. Hence, we caution that sterling volatility may pick up from end April until an extension request is made,” it said. 

Barclays flagged up the “possibility of a second Scottish referendum given the Scottish National party’s large win in Scotland” as well as “sluggish domestic growth momentum and downside risks for Bank of England policy”. 

Line chart of £ per € showing The pound rises against the euro