LONDON MARKET MID-MORNING: Record High As Markets Hail Tory Win

(Alliance News) - Stocks in London were sharply higher at mid-morning on Friday with investors flocking back to equities as the Conservative Party sealed a landslide victory in the UK general election.

UK Prime Minister Boris Johnson declared 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 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 Brexit deal through parliament which has caused years of uncertainty in the UK.

The FTSE 100 index was 115.35 points higher, or 1.6%, at 7,388.13.

However, the mid-cap FTSE 250 index, with its much more UK-focused stocks, was 905.08 points higher, or 4.4%, at 21,698.11. The midcap index hit an all-time high of 21,910.75 in early trade as the threat of nationalisation posed by a win for Labour was lifted.

The AIM All-Share index was up 2.0% at 917.13.

The Cboe UK 100 index was 1.5% higher at 12,534.47. The Cboe 250 was 4.9% higher at 19,636.20, and the Cboe Small Companies was up 1.5% at 11,526.30.

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 the performance of sterling 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 the markets were too pessimistic 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 have earnings closely tied to the UK economy, such as housebuilders and banks, 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. Continuation of current government policy ought to drive further recognition of value in the housebuilders," said Jefferies analysts Glynis Johnson and Priyal Woolf.

In addition, Royal Bank of Scotland, Lloyds Banking Group, and Barclays were up 11%, 4.8% and 7.9% respectively. Midcap challenger bank Virgin Money UK was the best performer, up 18%.

"Banks were also bid - with the most heavily exposed banking stocks to the UK economy enjoying the biggest gains...Investors are also needing to dial back their expectations for a Bank of England rate cut so this is an important boost for the banking sector in the UK, with Lloyds in particular the most exposed to the mortgage market," commented Markets.com analyst Neil Wilson.

In addition, stocks that were under pressure heading into the election amid the risk of nationalisation, such as utilities, under a Labour government were higher.

SSE, Severn Trent and British Gas owner Centrica were up 9.9%, 7.8% and 8.7% respectively.

BT was up 7.8%. Before the election, Labour leader Jeremy Corbyn had pledged to bring the telecommunications company under partial state ownership.

Conversely, internationally-exposed companies were among the blue chip fallers with oil majors Royal Dutch Shell 'A' and 'B' shares down 0.7% and BP down 0.3%. Asia-focused lender Standard Chartered was down 0.3% and plumbing specialist Ferguson, which makes a bulk of its revenue in the US, was down 0.3%.

The pound was quoted at USD1.3404 Friday, up from USD1.3127 at the London close Thursday. 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, said: "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."

The euro stood at USD1.1178 Friday morning, up from USD1.1118 at the European equities close Thursday.

Against the yen, the dollar was trading at JPY109.65, higher than JPY109.10 late Thursday.

Brent oil was quoted at USD64.88 a barrel Friday morning, up from USD64.38 late Thursday. Gold was quoted at USD1,471.80 an ounce Friday morning, up from USD1,466.10 late Thursday.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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