Traders See Consumer Optimism Surviving Vote

(Bloomberg) -- The prospect of quieter politics and a continued economic recovery after the UK’s election on July 4 should keep consumer confidence and the retail sector on track, strategists say.

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For now, equity and currency traders are on the sidelines and counting down the days. Labour’s election manifesto due next week isn’t seen changing their calculus, with both parties limited in terms of big spending commitments. Positive trends already in place will become the focus once the vote is out of the way.

Wage growth, a stable pound, and an uptick in housing prices have lifted expectations, according to Goldman Sachs Inc. strategists led by Sharon Bell.

“As prices fall and wages stay relatively sticky, this should boost consumer discretionary,” Goldman’s Bell wrote.

The prospect of rate cuts from the Bank of England also helps, JPMorgan Chase & Co. says.

According to strategists at the bank, any new government policies will generally affect small and mid-sized companies the most.

The team led by Mislav Matejka already had an overweight recommendation on UK equities. But they’ve switched to favoring the FTSE 250, which derives about 50% of its revenue from the UK, over the blue-chip dominated FTSE 100, where 75% of revenue comes from outside the country.

In currency markets, sentiment toward the pound has improved and sterling has recovered from its 2022 low. Bullish speculative bets on the pound have risen.

At the same time, previous peaks are still distant and there’s room for more gains.

Still, exposure to the UK stock market remains comparatively depressed and mutual fund equity flows into the UK are more subdued than into other regions, according to Barclays Plc.

Investors may wait “until the political and economic policy landscape becomes clearer,” strategists led by Emmanuel Cau wrote.

Investors are increasingly using derivatives to bet on gains for UK equities, while keeping their risks low, they say. The FTSE 100 has seen far greater activity in options to buy shares than options to sell them compared with other major European indexes. That’s left the so-called call-to-put volume ratio near 10-year highs.

For now, most market watchers expect the pound and gilts to post small moves should a Labour landslide materialize.

“Monetary policy will not be affected and the fiscal space is extremely constrained, limiting the wiggle room for any elected party,” UBS strategist Patrick Ernst wrote in a note.

In the longer term, the possibility of improved trade relationships with the European Union under Labour could be positive for the pound. With the vote decided, political stability and reduced policy uncertainty will “greatly benefit UK businesses and growth,” he said.

A survey by Nomura International Plc also backed the view that reaction to a possible Labour win will be muted.

Of those who do anticipate market ripples, there was a small bias in favor of a stronger currency and a possible drop in bonds, European economist George Moran wrote.

Regardless of the vote, UK stocks appeal because of their low valuations and the potential tailwind from a recovery in manufacturing, said UBS Wealth Management economist Dean Turner.

“Hopefully, the election campaign gets a little more interesting in the next couple of weeks,” he said.

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