Barings: UK-Wahlergebnis überrascht

“There is only one poll that matters and that is the election itself. The result is something of a surprise given the pre-election polls had predicted a hung-Parliament. No single party was forecast to emerge with a majority but as the last votes are tallied the Conservative Party will have the chance to govern with what looks like a slim overall majority. As this was not priced in by markets, sterling has rallied sharply overnight up more than 1.5% versus the US dollar and just over 2% from the 5pm close versus the €uro. Gilts will open stronger but in the context of global bond markets rallying after several days in free-fall. 

“The upside potential from here for sterling is, in our view, limited but importantly the risk of a lurch lower in the pound is also less likely as financial markets are reassured by continuity and the prospect of further fiscal consolidation. This should ensure interest rates remain lower for longer. The job is clearly not done (in reducing the debt/GDP burden) but this morning that will largely be forgotten in the euphoria of a relief rally. Further down the road the new Government will be anxious about the lack of productivity growth in the UK and dependency on the consumer for growth and a lower exchange rate, particularly against the €uro, may be a means to rebalance the economy and underwrite growth. 

“For gilts, the recent rout in global bond markets has impacted all markets but the UK bond market has offered some protection against the rise in German bund yields and the 10 year yield pick-up from owning gilts has narrowed from around 1.5% to 1.3% making gilts less compelling at today’s levels but still attractive compared to European bonds. The next movements are likely to be driven by external factors and today the US payroll data will assume massive importance for global bond markets. 

“Longer term, the next worry for investors will be an In-Out Referendum on continued membership of the European Union which PM Cameron has vowed to hold in 2017. It will be interesting to see if the poor showing of UKIP changes the PM’s determination to hold this ballot. If it goes ahead, the business community will bring strong support to both sides during what could be a long and damaging debate but quoted companies would almost certainly want to avoid a divisive Referendum with all the attached risks it would bring to investment and expenditure plans until resolved.”