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May 08, 2015 01:00 AM

Conservative Party's election victory boosts U.K. markets

Sophie Baker
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    Jason Alden/Bloomberg
    David Cameron, prime minister

    The U.K. equities market received a boost Friday from an unanticipated outcome in the general election, with the Conservative Party set to form an outright majority government.

    As votes were counted and announced, equities rallied when markets opened. The FTSE 100 gained 2% within the first hour of trading, and the FTSE 250 index was up 3%.

    At the market close, the FTSE 100 was up 2.32% and the FTSE 250 was up 2.8%. The pound was up 1.33% to the dollar as of 3 p.m. EDT.

    The outcome is far removed from the uncertainty that the U.K. and markets experienced in the runup to the election, with polls suggesting coalitions to form any majority government.

    Money managers were positive on the certainty that a majority government brings, removing the risk of a short-term hit to U.K. assets and the currency. However, the outright Conservative leadership does keep alive the potential for a referendum to decide whether the U.K. will remain in the European Union.

    “The curveball … further down the track could be (Prime Minister David) Cameron's EU referendum call for 2017,” said Neil Williams, group chief economist of Hermes Investment Management, in a news release. That, he said, might raise fears of weaker trade ties and “a diluted relationship with the U.S.”

    “Politicians will need to demonstrate they fully understand the implications of remaining within or withdrawing from the EU,” said Rory Bateman, head of U.K. and European equities at Schroders, in a news release.

    Stephanie Flanders, chief market strategist for Europe at J.P. Morgan Asset Management, reiterated her comments from a recent briefing that while the election matters, there are more important things. “Even this very surprising result cannot outweigh the more global forces that have hit U.K. asset markets in recent weeks: the price of 10-year gilts are still lower than they were at the start of April as yields have surged across global fixed-income bonds.”

    Addressing the elections impact on pension initiatives, Lynda Whitney, partner at Aon Hewitt, said in a news release: “The Conservative Party's overall majority, although small, may allow for a period of relative stability in the pensions industry as many of the coalition government's policies are allowed to bed in. In particular, recently announced measures such as the increase in the normal minimum pension age to 57 from 2028 and the reduction in the Lifetime Allowance to £1 million from 2016 will be able to proceed into legislation. The decision not to lower the standard annual allowance might be expected to remain government policy.

    “We would expect the new government to put into effect the pensions measures set out in the Conservative Party's general election manifesto, including the continued use of the 'triple lock' for state pension increases and the reduction in tax relief on pension contributions for people earning more than £150,000.”

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