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(Alliance News) - Stocks in London were sharply higher at midday on Friday following a resounding win for the Conservative Party in the UK general election, lifting the pound and domestic sectors that would have been threatened by a Labour government.
Investor sentiment was given a further boost as a new round of tariffs on Chinese goods, set to take effect on Sunday, looked likely to be avoided. The superpowers are expected to sign an interim agreement which would see Washington drop some tariffs and Beijing buy more US goods.
UK Prime Minister Boris Johnson declared that his party has "smashed the roadblock" and "ended the gridlock" as he hailed the biggest Conservative majority since the 1980s.
Johnson was on course to finish with more than 43% of the popular vote, the highest for a Tory leader since Margaret Thatcher's victory in 1979 and around the same as Tony Blair's in 1997.
The Tory landslide prompted Jeremy Corbyn to announce that he will not lead Labour into another election after his party suffered humiliation across the country, losing seats in Labour heartlands to the Tories.
Liberal Democrat leader Jo Swinson lost her seat to the SNP and quit as party leader. Ed Davey and Baroness Sal Brinton will become joint acting leaders ahead of a leadership contest next year.
Having secured a majority victory the PM has sufficient power to drive his EU departure deal through Parliament after three-and-a-half years of political uncertainty about Brexit.
European Council President Charles Michel congratulated Johnson on his victory, tweeting: "We expect a vote on the Withdrawal Agreement as soon as possible."
US President Donald Trump congratulated the PM on his "great win" and said the UK and US would be free to strike a "massive" new trade deal after Brexit. Trump tweeted: "This deal has the potential to be far bigger and more lucrative than any deal that could be made with the EU Celebrate Boris!"
The FTSE 100 index was 133.62 points higher, or 1.8%, at 7,407.09.
More dramatically, FTSE 250 index, with its much more UK-focused stocks, was up 867.32 points, or 4.2%, at 21,660.35. The midcap index hit an all-time high of 21,910.75 in early trade.
The the AIM All-Share index was up 2.0% at 917.69.
The Cboe UK 100 index was 1.6% higher at 12,548.47. The Cboe 250 was up 4.9% at 19,625.20, and the Cboe Small Companies up 2.1% at 11,584.30.
In mainland Europe, the CAC 40 in Paris was up 1.2%, while the DAX 30 in Frankfurt was 1.3% higher.
Analysts at Jefferies said: "As we highlighted in UK: An Equity Investor's Guide to UK Elections the performance of sterling (cable) is a good lead indicator for UK equity market returns. While the FTSE 100 offers exceptional high free cash flow yield ex-financials versus UK Gilts, the strength of the pound will act as a brake on returns given that 50% of revenues have dollar revenues.
"In this respect we switch our modestly bullish recommendation on the FTSE 100 to FTSE 250. For the best part of 2019 we had held a view that the markets were too pessimistic that a Brexit deal would not get approved. With respect to our thematic baskets we would prefer a basket of UK banks, UK homebuilders and water companies."
In the FTSE 100, companies which are closely tied to the UK economy, such as housebuilders and domestic lenders, were sharply higher.
Taylor Wimpey, Barratt Developments, Persimmon and Berkeley Group were up 15%, 12%, 12% and 11% respectively. Midcap housebuilders, Bellway, Redrow and Crest Nicholson were up 11%, 10% and 8.5% respectively.
"The Tory majority win was positive for the share prices in the UK construction sector not just reflecting policy clarity, but also in reducing the risk profile to the under-invested non-UK investor. We believe upside to forecasts could be most pronounced for those exposed to the commercial end-market (Polypipe, Morgan Sindall). Continuation of current government policy ought to drive further recognition of value in the Housebuilders (Persimmon, Berkeley)," said Jefferies analysts Glynis Johnson and Priyal Woolf.
In addition, Royal Bank of Scotland, Lloyds Banking and Barclays were up 11%, 4.8% and 7.9% respectively. Midcap challenger bank Virgin Money UK was the best performer, up 18%.
Barclays analyst Emmanuel Cau said: "Domestic UK sectors like Banks, Homebuilders, Utilities and Real Estate are likely to be supported the most. With a large Tory majority effectively providing a floor to GBP, we expect UK equities to underperform their euro area peers further into 2020.
"More broadly, we believe that the end of the political deadlock in the UK, with disorderly Brexit and Labour government tail-risks now removed, along with the improving trade war newsflow and the rising evidence of a bottoming-out in global growth, could be the triggers for investors to add back to European equities and rotate out of the US."
Stocks that were under pressure heading into the election amid the risk of nationalisation under a Labour government were higher.
Utilities SSE, Severn Trent and British Gas-owner Centrica were up 8.7%, 8.4% and 7.6% respectively.
BT was up 7.6%. Before the election Corbyn had pledged to bring the telecommunications company's Openreach broadband infrastructure arm under state ownership.
Additionally, BT has agreed to sell its Spanish business to Portobello Capital, Spain's El Pais newspaper reported. Citing sources close to the matter, El Pais said the sale of BT Spain will be unveiled in the company days.
Rail and bus operators, another sector threatened with nationalisation by the Labour manifesto, were higher. Stagecoach Group, Go-Ahead Group and FirstGroup were up 14%, 13% and 7.2% respectively.
Conversely, internationally-exposed companies were among the blue-chip fallers, hit by a rising pound. Oil majors Royal Dutch Shell 'A' and 'B' shares were down 0.7% and BP down 0.3%. Asia-focused lender Standard Chartered was down 0.3%.
Pest control company Rentokil Initial was the worst blue-chip performer, down 1.7%, with analysts at Jefferies suggesting a Conservative victory was not priced into the stock.
"With 40% of revenue from the US, Rentokil is highly exposed to the GBP/USD rate. Looking to 2017 results on March 1, 2018, there is precedence for the stock to sell off strongly on foreign exchange downgrades that are unable to be offset elsewhere," Jefferies said.
The pound was quoted at USD1.3382 Friday, up from USD1.3127 at the London close Thursday, easing from the highs reached as the first election results trickled through.
Sterling surged to a 19-month high of USD1.3514 overnight versus the greenback as it became clear the Conservatives would secure a majority.
Phil Smeaton, chief investment officer at Sanlam UK: "As far as equity markets are concerned, this is a favourable outcome. Removing the uncertainty around Brexit in the UK will free businesses to unleash a surge in investment, and consumers should once more feel confident enough to spend their well-deserved wage gains. Investors in the UK can relax as their taxes remain unchanged, and global investors are likely to feel comfortable enough to commit capital to one of the world’s cheaper equity markets.
"The surge in the pound brings it closer to fair value on a purchasing power parity basis, and we can expect the flight to safety in government bonds unwind slightly. Inflation expectations may tick higher as Boris implements his fiscal spending plans, which would be another reason for economic growth to accelerate. Just as the US market took off after Donald Trump's market friendly policies were analysed, we may see the UK stock market benefit in much the same way in Britain."
Stocks in New York are set for a higher open with the DJIA called up 0.6%, the S&P 500 index up 0.5% and the Nasdaq Composite up 0.7%, following record highs reached on Thursday.
US stocks had rallied after Trump declared Thursday that a deal to de-escalate the trade war with China was imminent, but Beijing remained coy on Friday and cautioned any agreement must be "mutually beneficial".
Trump's flagging of a trade breakthrough offered relief to investors as new tariffs were planned to take effect Sunday.
However, in a sign that tensions remain high between the two powers, Foreign Minister Wang Yi on Friday said Washington was "suppressing" China across a number of fields, including the economy, trade and technology.
Speaking at a symposium on international affairs in Beijing, Wang said the US has "seriously damaged the foundation of hard-earned trust between China and the US".
IG Group analyst Chris Beauchamp said: "It is not just the UK election that is animating markets, however. It looks like the US and China might finally get through their own phase one, with a trade deal of sorts now looking likely. This has bolstered sentiment in European stocks and in the euro, although there is still the risk that Trump will turn his eye to Europe if he can get a deal with China. US futures have surged, with more record highs looking likely today."
The euro stood at USD1.1184 Friday midday, up from USD1.1118 at the European equities close Thursday.
On the continent, Germany's central bank slashed its 2020 growth forecast for Europe's largest economy in half, but said an export-powered rebound was on the cards in the following years.
The Bundesbank predicted 0.6% expansion next year, half the pace it had reckoned with in its last outlook in June.
Against the yen, the dollar was trading at JPY109.65, higher than JPY109.10 late Thursday.
Brent oil was quoted at USD65.12 a barrel Friday midday, sharply higher from USD64.38 late Thursday.
Gold was quoted at USD1,470.80 an ounce Friday midday, up from USD1,466.10 late Thursday.
By Arvind Bhunjun; arvindbhunjun@alliancenews.com
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