Traders Signal U.K. Election to Jolt Calm in Equities
By Sofia Horta e Costa and Inyoung Hwang
(Bloomberg) — Traders are signaling that the record calm
in the U.K.?s main stock index is about to be upended.
While elections to decide Britain?s next ruling party
aren?t until May 7, the outcome is still in enough doubt that
options prices show FTSE 100 Index volatility will likely soar
from its record low against that of European shares.
Banks, transport companies and state contractors including
Serco Group Plc may be vulnerable, SVM Asset Management?s Colin
McLean says. Nomura Holdings Inc. sees risks in real estate,
utilities and homebuilders. Societe Generale SA advised staying
away from the country?s equities altogether.
?It?s hard to calculate,? said McLean, founder and chief
executive officer of SVM Asset Management in Edinburgh. His firm
oversees more than $800 million. ?It will create a lot of
uncertainty, not only on taxes but particularly with the U.K.
pushing its agenda to withdraw, and Scottish independence
potentially coming up again.?
With the FTSE 100 near a record high, politics may once
again overshadow a rebound that has given U.K. stocks one of the
decade?s best starts to the year. Investors have seen this
before: Concern over Scotland?s independence vote in September
ignited a 56 percent surge in volatility in less than two weeks.
The FTSE 100 rose 0.1 percent at 9:02 a.m. in London.
2017 Vote
A Conservative-led government may trigger a split from the
European Union, with Prime Minister David Cameron promising a
national vote by 2017. A Labour-led one might clash with
businesses by freezing energy prices and reversing a corporate-
tax cut plan. Labour has also proposed breaking up the country?s
biggest lenders.
And then there?s the U.K. Independence Party, which
champions anti-immigration and anti-EU policies.
Opinion polls show Labour ahead, albeit mostly within the
margin of error. Betting odds signal a coalition between
Conservatives and Liberal Democrats most likely.
Implied volatility, a measure of expectations for stock
swings, was 2.6 points higher for three-month FTSE 100 options
than one-month contracts on Feb. 19, data compiled by Bloomberg
show. That gap has widened since holding near zero for most of
January.
Most Disliked
The U.K. remains the most disliked market in the world, a
Bank of America Corp. survey of fund managers showed this week.
Some 42 percent of respondents said they will hold fewer U.K.
stocks than represented in global benchmarks in the next 12
months, compared with 17 percent in January, the bank found.
Even with the FTSE 100 closing 0.6 percent away from an
all-time high, its 4.9 percent gain this year is less than half
that of the Stoxx Europe 600 Index. On Feb. 17, the U.K. gauge
ended the day at its highest level since December 1999, when it
hit a record.
Both Tory and Labour policies will probably end up more
?market friendly in practice than they appear on paper,? and
most uncertainty is priced in, Goldman Sachs Group Inc. said in
a note this week.
And there are pockets of value: Industrial stocks including
plastic-packaging maker RPC Group Plc have yet to benefit from
low oil prices, while the weaker pound against the dollar will
help British exporters, says George Godber of Miton Group Plc.
?We?re not finding any shortage of ideas in the U.K.,?
said Godber, who helps manage about $5 billion at Miton in
London. ?What had been a huge currency headwind has certainly
become more of a tailwind. The U.K. still has the perception of
relative stability.?
Economic Growth
The British economy will expand 2.6 percent this year,
economists estimate. That?s more than double the forecast rate
of growth for the euro area.
The FTSE 100 isn?t safe from bouts of investor panic. The
gauge hit a low in October as concern about a slowing global
economy deepened an oil rout — energy producers have the
biggest weighting in the index. The rebound that followed proved
brief as crude kept tanking and political wrangling in Greece
triggered a drop to a 1 1/2-year low.
?Investors may sit on their hands while they watch this
play out,? said Darren Hepworth, the global trading director of
TD Direct Investing (Europe) Ltd. in Leeds, U.K. ?There?ll be
some political jousting taking place over the next couple of
months. That will move some investors to the sidelines.?