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Tradition and necessity dictate that on the night of a potentially momentous national vote in the UK, sterling traders put in a night shift.
Banks, keen to keep their toiling traders in London alive, typically lay on pizza and fizzy pop as fuel for what can be a busy stint in one of the few markets that never sleeps (on weekdays at least). The best relatively recent example of this was the Brexit referendum of 2016. That was a long night, characterised by a spectacular collapse in the pound in the wee small hours and a monstering for stocks, particularly bank stocks, when the stock exchange later opened.
Ahead of Labour’s thumping victory in this general election, however, pizza and pop were in short supply in the City. No night shift was required. Options markets had braced for a little volatility in the pound for the day after the vote — but as a just-in-case hedge rather than a shield against an ugly market rout.
The exit polls at 10pm on election day generally provide the first opportunity for traders to express a view on the vote result. But this time around, when those polls pointed to a hefty majority for Sir Keir Starmer’s Labour party, you could count the number of wholesale trades in the pound passing through dealing screens on the fingers of one hand, as one banker told me at the time.
When markets did fully open you could be forgiven for wondering whether an election had taken place at all. A modest pick-up for stocks was broadly in line with the rest of Europe, although housebuilder stocks outperformed, while bond prices ticked higher and the pound was still steady as she goes.
You can write this off as a reflection of the fact that the opinion polls had pointed to a large Labour win for months. But nothing is ever truly fully priced in.
In this instance, insouciance is the greatest form of flattery. If Liz Truss had managed to secure a similar shrug from investors for her 2022 “mini” Budget then she would probably still be in place. Instead, her stint as prime minister lasted for a shorter period than the life of an iceberg lettuce and she has now got the boot from parliament altogether.
The UK now stands out as one of the safer bets in the region, particularly when set against the fraught political landscape in France, where second-round elections are likely to produce either a hung parliament or a hard-right government in the coming days. Shahab Jalinoos, a currencies analyst at UBS, says the UK and sterling now offer an “island of stability”. The pound has already edged up against the euro since French President Emmanuel Macron called parliamentary elections. It could sweep higher over the next year or so if Germany follows France’s shaky path.
“If we get to the point where German elections result in a swing to the right, that’s when you are looking at maybe a 10 per cent rise in the pound,” Jalinoos said.
Amundi, Europe’s largest asset manager with €2tn under management, sent out a similar message over UK government bonds. “Starmer’s election takes British government bonds a step closer to becoming a safe haven, with the UK scoring well on inflation and fiscal dynamics, as well as on political risk,” said Monica Defend, head of Amundi Investment Institute. It scarcely needs pointing out, but the contrast here with the shortlived Truss era could not be starker.
“A re-rating is merited and would be a big turnaround after the volatility seen during the years of UK political uncertainty that started with Brexit in 2016. While UK fixed income doesn’t have a huge weight in global benchmarks, there may be a case for international investors to reconsider their strategic allocation given it offers a way to add a good-quality yield with interesting diversification characteristics,” Defend added.
For stocks, it is a little trickier, in part because the main UK stocks index — the FTSE 100 — is a better barometer of the health of global companies, particularly in commodities, than it is a gauge of the UK’s fortunes themselves.
But opinion is divided on whether the stability that Labour’s massive majority brings will make a big difference. “I’m not so sure,” said Bjoern Jesch, chief investment officer at German asset manager DWS. “In terms of international trade, I’m not a fan of the UK.” In part, this is because it is not enough of a low-cost manufacturing hub, particularly since Brexit crimped the supply of cheap labour, he said. The election is unlikely to change that quickly.
Still, particularly in the context of Friday’s scant market reaction to the election result, “boring is good”, as Laura Foll, a portfolio manager at Janus Henderson Investors, put it.
“Since the Brexit vote in 2016, UK equities have de-rated relative to overseas peers as a result of political uncertainty. This election result, however, brings with it the potential for politics to ‘tread quieter’ on the UK equity market, allowing investors to refocus on the positive attributes of many UK-listed businesses,” she said.
Investors would take predictable and boring over midnight feasts of free pizza and fizzy drinks any day of the week.
katie.martin@ft.com
