UK Domestic Stocks Rally While Risk-Off Mood Hits Wider Europe

(Bloomberg) -- Shares exposed to the British domestic economy rallied following a landslide victory for the Labour Party. However, European stocks gave up the day’s gains in a broader risk-off move.

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The domestic-heavy FTSE 250 Index was up 0.7% at the close in London, trimming an earlier advance of 1.8% as money managers said they expect the Labour Party under Keir Starmer will usher in calmer and more moderate policy, turning the page on years of turmoil marked by the gilt crisis, Brexit and the Scottish referendum. The export-heavy FTSE 100 dropped 0.6% as the pound strengthened. The Stoxx Europe 600 Index fell 0.2%, while France’s CAC 40 slipped 0.4%.

“I would guess traders are squaring off their positions ahead of the French elections after the decent bounce following the first round of voting,” said James Athey, a portfolio manager at Marlborough.

In the UK, investors are betting that the Labour Party’s win will lead to political stability that could support a potential rebound in economic growth. With only the last results still to come, Keir Starmer’s party had secured 412 of the 650 seats in the House of Commons, the most since Tony Blair’s 1997 win.

“Overall, the picture is one of stability,” said Georgina Hamilton, a portfolio manager at Polar Capital. “There’s potential for a more constructive relationship with the EU, which could unlock some business investment that has lagged since Brexit.”

UK homebuilders were a notable outperformer, with Labour having pledged policies that would see 1.5 million new houses being built. Persimmon Plc and Vistry Group Plc both jumped, among leading gainers on the FTSE 100.

“We like mid-caps, consumer stocks and homebuilders in light of these election results,” UBS Group AG strategist Gerry Fowler said in emailed comments.

“The UK consumer was already benefiting from strong nominal wage growth,” Fowler said. “Upcoming rate cuts and the Labour policy plans could further support this, particularly in homebuilding where we see value and interest from investors.”

Meanwhile, Paul Jackson, global head of asset allocation research at Invesco, said a potentially more stable political environment could lift valuations of UK stocks as a whole.

“If the Labour party continues with the line that it wants to improve relationships with the European Union, it should encourage investors to be more friendly towards the UK,” Jackson said.

The next catalyst for European stocks will come over the weekend, when France votes in the second round of the parliamentary elections. No matter which party comes out on top in Sunday’s French parliamentary election, some investors are betting the vote marks the beginning of a more turbulent period for the country’s stock and bond markets.

Meanwhile, data on Friday showed US hiring moderated in June and prior months were revised lower, bolstering prospects that the Federal Reserve will begin cutting interest rates in coming months.

For more on equity markets:

  • French Political Risk Is Unlikely to Abate Quickly: Taking Stock

  • M&A Watch Asia: Aramco, Adnoc, Santos, HSBC’s German Unit

  • IPO Revival Seen Stalling in Europe in Second Half: ECM Watch

  • US Stock Futures Unchanged

  • Activist Implant: The London Rush

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--With assistance from Juliette Laffont.

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