By Mike Dolan
LONDON (Reuters) – The remarkable thing about investor reaction to the UK’s new Labour government is how much just a modicum of stability, consistency and competence is being richly applauded.
With exposure to British assets at such a low ebb after a decade of Brexit upheaval, seemingly endless leadership switches and 2022’s almost farcical budget flub, it’s a low bar to jump to please the financial crowd right now.
And that’s probably just as well.
Mindful of limited fiscal space for any outsize signature spending push, Labour’s proposals have been modest and hinge mostly on lifting growth with supply-side reforms such as simpler planning laws or seeding private-sector investment with grains of limited public sector cash.
Coupled with moves to improve Britain’s battered relations with European Union trading partners and a huge parliamentary majority that sees it comfortably in power for much of the rest of the decade, the temptation for global fund managers to tilt back toward unloved UK assets is clear.
And “softly, softly” music rather than “crash, bang, wallop” is perhaps what’s most soothing to the ear, not least in a year of noisy and confusing politics elsewhere.
“(Prime Minister) Keir Starmer’s first task is simply to rebuild faith in government,” reckoned Jason Thomas, Carlyle’s head of investment strategy. “Even modest success could prove a boon to UK asset prices.”
That may already have shifted the dial for some.
“We turn overweight UK stocks,” BlackRock Investment Institute Chairman Tom Donilon flagged on Tuesday as the world’s biggest asset manager published its half-year outlook in the wake of last week’s election. “The potential for relative political stability and attractive valuations may pull in foreign investors.”
The global snub of UK equity – where the FTSE 100 trades near a record 50% valuation discount to Wall Street’s and which has seen billions of pounds exit over 44 straight months of net outflows through June – has long seemed ready for a rethink on even a whisper of growth or change in overseas sentiment.
What’s more, analysis by fund tracker EPFR suggests there has been more interest from active managers tracking FTSE250 midcap stocks for some quarters than the dire cumulative outflows suggest.
That’s also true for the pound – which on a trade-weighted basis is back to levels not seen since it was sunk by the Brexit referendum eight years ago and where speculative net longs have returned in recent weeks leading to the election.
CFTC data showed net sterling long-jumped to 62,041 contracts in the week to July 2 – the largest since March.
BORING NOT BAD
BlackRock claims it remains neutral on British gilts – the epicentre of the market quake surrounding 2022’s budget blowout under then-Prime Minister Liz Truss. But it said long-term gilts now “stand out” again as a strategic play and it also likes inflation-linked sovereign bonds.
What is for sure is that the first gilt auction of the new government on Tuesday saw linker debt go like hotcakes.
The Debt Management Office said it sold 4.5 billion pounds of an inflation-linked 30-year debt – where orders had topped a whopping 66 billion from record 222 bidders.
And that chimed with the take from Europe’s biggest asset manager Amundi, whose response to the election result last week was to say gilts came “a step closer to becoming a safe haven” due to improving UK inflation and fiscal dynamics.
“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 and continued through Liz Truss’ short tenure,” it said.
Gabriella Dickens, G7 economist at French asset manager AXA Investment Managers suggests a quiet return of understated UK stability could have profound long-term implications.
“The UK appears, for the first time in a while, bright compared to its peers,” she said, adding the so-called King’s Speech on the government’s legislative plans on July 17 would likely retain the predictable tone Labour campaigned on.
“Boring is not a bad thing for economies,” she said, stressing a recovery of external investment into the UK would be “a material tailwind for growth and an unseen boon for the new government.”
Germany’s Deutsche Bank this week said there were “upside risks” to its 2024 forecast of 0.8% – accelerating to 1.5-1.6% over the next two years. “The new Labour government will likely benefit from a post-election growth dividend, with cyclical tailwinds strengthened.”
And as to a better post-Brexit settlement with the European Union, advice from many in that sphere is also that an open and cordial approach is better than new demands or a dramatic change of tack.
Starmer on Monday promised improved post-Brexit trading rules and a revamp of the “botched deal” signed by former premier Boris Johnson – but he may just need to knock on some doors again to reap rewards.
“A period of calm, predictable and constructive diplomacy would do wonders for the UK’s reputation,” wrote Charles Grant at the Centre for European Reform in an open letter to Starmer on ways to re-engage with the EU on a host of different levels.
To be sure, market reaction since Thursday’s results has not been overly dramatic.
Long prepared by months of opinion polls pointing to a Labour landslide, the pound, gilts and UK stocks have given back some of the early modest gains.
But the bar for Labour to deliver what most international investors seem to want is clearly not that high and is already being jumped.
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan X: @reutersMikeD; Editing by Rod Nickel)
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