Labour Victory Would Be Best Outcome for the Pound, Survey Says

(Bloomberg) -- A Labour victory in next month’s UK election would be good news for the pound but is unlikely to undo the damage of Brexit, according to the latest Bloomberg Markets Live Pulse survey.

Most Read from Bloomberg

• Russia Is Sending Young Africans to Die in Its War Against Ukraine

• Macron Gambles on Snap French Election in Bid to Stop Le Pen

• Macron and Scholz Get Trounced by Far Right in EU Elections

• Investment Bank Moelis Probes Incident After Video of Employee Appearing to Punch Woman

• New York Fed Is Losing Talent and ‘Street Cred’ Under John Williams

When asked which outcome in the July 4 vote would be best for the UK currency, more than half of 268 respondents opted for a Labour win, although they were split on whether a large or small majority would be best. A hung Parliament, with no party winning more than half the seats on offer, was seen as the worst result.

Polls show Keir Starmer’s party is on course for a landslide victory, raising hopes among City of London analysts that a new government would usher in a period of stability and lift the overhang of Brexit, which has weighed on UK assets for years. Labour has pledged to improve ties with the European Union, a step that could help ease trading frictions and help spur growth.

Still, survey participants see little reason to be optimistic that the pound will shed its Brexit penalty anytime soon, with about 61% saying the currency will take more than five years to trade around $1.50 — a level last seen before the final results of the EU referendum were announced.

“A large stable majority for the Labour Party, which is less divided than the Tories, will signal better stability ahead,” said Derek Halpenny, head of research for Europe, Africa and the Middle East at MUFG.

Even so, “significant changes to the EU and UK trading relationship are unlikely to be an immediate priority for the Labour party, which may dampen immediate upside potential for the pound,” he said.

In addition to the pound, the MLIV Pulse survey showed that gilts and stocks would also benefit from a Labour win, with 57% or more of respondents thinking that a victory would be beneficial for all UK assets, with a win by a big margin the most preferred option.

Still, in a sign of some division, 34% of respondents say a Labour landslide would be the most damaging result for the pound, with a further 46% seeing a hung Parliament as the worst outcome.

These fears don’t seem to be shared by the market, however. With less than a month to go before the vote, contracts that protect against pound volatility are fairly subdued.

A landslide Labour win is already priced by markets, said UBS strategist Patrick Ernst. “Political stability and reduced policy uncertainty would greatly benefit UK businesses and growth,” he said.

Traders’ renewed trust in Labour illustrates how far Starmer has moved the party away from radical policies, such as the nationalization of energy networks, that were pursued under his predecessor, Jeremy Corbyn. It also shows the damage that the Conservatives — traditionally preferred by investors — have done to their brand through the turmoil of Brexit and years of infighting.

Among the two parties, Labour is also seen as marginally more able to boost economic growth and the most likely to raise taxes, the Bloomberg survey showed.

To be sure, Labour’s ability to completely break from the uncertainty and turmoil over Brexit is probably limited. Despite its promise to work closer with the EU, the appetite to reverse the UK’s departure from the bloc is limited, meaning that the Brexit penalty — especially for the pound — is likely to endure.

Recent elections in India and Mexico have also shown how traders were caught offside by outcomes, causing wild swings in asset prices.

Even so, there’s scope for at least some pound gains through closer cooperation with the EU and political stability, said Jane Foley, head of FX strategy at Rabobank in London.

“Sterling may offer value if you believe that the UK is well positioned to benefit from more investment, because of an improving relationship with Europe, and a political environment which is a lot more stable than it was,” Foley said.

The MLIV Pulse survey was conducted between June 2 and June 7 among Bloomberg News terminal and online readers worldwide who chose to engage with the survey, and included portfolio managers, economists and retail investors.

--With assistance from Naomi Tajitsu and Greg Ritchie.

©2024 Bloomberg L.P.