The strong performance by the Conservatives and the concomitant falls by both Labour and the Liberal Democrats have meant that much of the immediate uncertainty about messy coalitions has been pushed to the side.
As Mike Amey, managing director and head of sterling portfolios at PIMCO said: “By eliminating the uncertainty surrounding a period of protracted cross party negotiations, the economy should be well set to achieve 2.5% to 3% growth for 2015.”
But, he added: “Longer term risks remain, not least the prospect of a referendum on EU membership. However with inflation set to remain comfortably below the Bank of England’s target for 2015 and most likely 2016, highly supportive monetary conditions should ensure above trend growth continues.”
Mark Dampier, head of investment research said while he expects to see markets react strongly in the wake of the surprise success, as happened in 1992, it is important not to overestimate the significance for the investment markets in the short term.
“Investors might do well to keep a closer eye on the bond markets than on the comings and goings in Downing Street.”
At a sector level, housebuilders gained on the news, and are expected, along with a number of other sectors, to continue to benefit from the Tory’s pro-business rhetoric and the stability a second term in office should bring.
According to a note by Liberum, the proUK risk environment will drive a number of relative moves, one of which will be the outperformance of domestic stocks relative to internationals, on the back of an improved UK economic outlook and a stronger sterling.
UK cyclicals should outperform defensive stocks, Liberum said, explaining: “In terms of sectors, we surveyed portfolio managers in March as to the likely outperformers if the Tories won. Financials, Support Services, Housebuilders and Consumer Discretionary were the clear front runners. This largely agrees with historical precedent (surprise Conservative win in 1992) apart from Support Services.”
Small and mid-caps should outperform large cap stocks, because of their higher skew to the domestic economy and UK cyclicals, the firm added.
The final two relative moves are built around an expectation of market re-risking, which should see value stocks outperform growth and high leverage stocks do better than low leverage.
