By Mike Dolan
LONDON (Reuters) – What has been remarkable about the investor reaction to Britain’s new Labor government is that little of its stability, consistency and competence have been widely praised.
With UK asset exposure at a steep low following a decade of Brexit upheaval, endless leadership changes and an almost unpalatable 2022 budget flub, it’s impossible to jump to please the financial crowd right now.
And that’s probably just as well.
Mindful of the limited fiscal space for a bigger signature spending push, Labor’s proposals have been modest and largely relied on lifting growth with supply-side reforms such as simpler planning laws or diversifying private sector investment with limited public sector cash .
In connection with the movement to improve Britain’s dilapidated relationship with the European Union trade partners and a huge parliamentary majority that sees comfortably in power for many more than a decade, the temptation for global fund managers to tilt back to unloved UK assets is clear.
And “soft, low” music instead of “crash, bang, wallop” is perhaps the most pleasing to the ears, at least in a year of noisy and confusing politics elsewhere.
“(Prime Minister) Keir Starmer’s first task is to rebuild faith in government,” said Jason Thomas, Carlyle’s chief investment strategist. “Even a modest success could prove a boon for UK asset prices.”
That may have changed the dial for some.
“We turn the UK stocks overweight,” BlackRock (NYSE: ) Chairman of the Investment Institute Tom Donilon flagged Tuesday as the world’s largest asset manager published a half-year outlook in the wake of last week’s election. “The potential for relative political stability and attractive valuations can attract foreign investors.”
The global snub of British equities – where trade is close to a record discount of 50% to Wall Street and which has seen billions of pounds out over 44 straight months of net outflows through June – has long seemed ready to rethink 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 several quarters than cumulative outflows would suggest.
That is also true for the pound – which on a trade-weight basis returned to a level not seen since it was plunged by the Brexit referendum eight years ago and where speculative net longs have returned in recent weeks leading to the Election.
CFTC data showed a net sterling long-jump to 62,041 contracts in the week to July 2 – the biggest since March.
boring is not BAD
BlackRock claims to remain neutral on UK gilts – the epicenter of the market earthquake around the 2022 budget explosion under Prime Minister Liz Truss. But he said long-term gilts are now “middle out” again as a strategic play and also like inflation-linked government bonds.
What is certain is that the first auction of the new government on Tuesday saw the linker debt like a hot cake.
The Office of Debt Management said it was selling 4.5 billion pounds of inflation-linked 30-year debt – where orders have topped 66 billion from a record 222 bidders.
And that chimed with taking from Europe’s largest asset manager Amundi, which in response to the election results last week said gilts come “a step closer to becoming a safe haven” because of increasing UK inflation and fiscal dynamics.
“A re-rating is warranted and would be a big change after the volatility seen during the years of UK political uncertainty that started with Brexit in 2016 and continued through the short tenure of Liz Truss,” he said.
Gabriella Dickens, G7 economist at French asset manager AXA Investment Managers suggests a calm return from the UK’s lack of stability could have long-term implications.
“Britain looks, for the first time in a while, bright compared to its peers,” he said, adding that the so-called King’s Speech on the government’s legislative plans on July 17 will keep the tone Labor predicts.
“Boredom is not a bad thing for the economy,” he said, insisting the recovery of external investment into Britain would be “a material tailwind for growth and an invisible boon for the new government.”
Germany’s Deutsche Bank this week said there was an “upside risk” to its 2024 forecast of 0.8% – accelerating to 1.5-1.6% over the next two years. “The new Labor government will benefit from the post-election growth dividend, with cyclical tailwinds strengthening.”
And as for a better post-Brexit settlement with the EU, the advice from many in the field is that an open and friendly approach is better than new demands or dramatic changes.
Starmer on Monday promised better post-Brexit trading rules and fixing the “botched deal” signed by former prime minister Boris Johnson – but he may have to knock on a few more doors to get his prize.
“A period of calm, predictable and constructive diplomacy will do glory to Britain’s reputation,” wrote Charles Grant at the Center for European Reform in an open letter to Starmer on ways to re-engage with the EU at various levels.
Of course, the market reaction since Thursday’s results has not been very dramatic.
Long prepared by a month of opinion polls pointing to a landslide Labor, pound, gilts and UK stocks have been given back some of the initial modest gains.
But the bar for Labor to send what most international investors apparently is not that high and has jumped.
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan X: @reutersMikeD; Editing by Rod Nickel)
