Election Stakes Build As U.K. Stocks Rally Most Since Thatcher
By Roxana Zega
Investors are taking precautions against losses amid the FTSE 100 Index?s biggest election-year rally since Margaret Thatcher won a third term in 1987.
The cost of hedging the equity benchmark climbed to the highest since August 2013 last week versus European equities. And the two biggest ETFs tracking U.K. stocks saw outflows of more than $708 million this year.
With a little more than two weeks before voting day on May 7, polls indicate the Conservatives and Labour Party are still neck-and-neck, with odds slightly in favor of a Labour win. That uncertainty comes as U.K. stocks become more expensive, with the FTSE 100?s 7.6 percent advance this year pushing its price-to-earnings ratio near a five-year high.
?It?s not worth jumping in given how close the race is,? said Stewart Richardson, chief investment officer at RMG Wealth Management LLP in London, who sold his U.K. equities because of the elections. ?We?ll just sit here and watch the election result.?
The cost of options contracts to hedge U.K. stocks have jumped 30 percent from record low in February versus those on euro-area equities. Volatility has soared too, rising 41 percent since a March low. The FTSE 100 was down 0.6 percent as of 9:07 a.m. in London.
The iShares Core FTSE 100 UCITS ETF is heading for a fourth month of outflows, while the iShares MSCI United Kingdom ETF traded in the U.S. lost money for two quarters, data compiled by Bloomberg show.
Here are some industries that analysts and strategists say could be affected by the election?s outcome, based on research reports from March and April:
*BANKS: A Labour-led government would probably bring higher levies, bonus taxes and potentially tighter regulation, according to RBC Capital Markets. A breakup of the large banks if the party wins is another risk, Societe Generale and HSBC Holdings Plc said. Lenders on the FTSE 350 Index have gained 2.6 percent this year, trailing the 14 percent jump for those on the Stoxx Europe 600 Index.
*INSURANCE: Whichever party wins, tax relief on pensions will probably be cut, which could result in declines in St. James?s Place Plc and Standard Life Plc, RBC said. A Labour government may also change recent reforms on pension and inheritance taxes, hurting confidence and the industry as a whole, according to the bank. The FTSE 350 Insurance Index is up 12 percent this year.
*UTILITIES: Labour promised to freeze energy bills and a win for the party would probably affect utilities — Centrica Plc and SSE Plc in particular, says Societe Generale. If the Tories win, the industry is likely to rally, the French bank said. The FTSE 350 Utilities Index has lost 2.4 percent in 2015 after five years of gains.
*REAL ESTATE: Investec says the prospect of a mansion levy from Labour and potential referendum on EU membership if the Conservatives win will keep buyers at bay. Demand for expensive houses is at a five-year low. The FTSE 350 Real Estate Index has climbed 12 percent in 2015 and rallied more than 15 percent in the past three years.
Bulls such as Lorne Baring, managing director of B Capital SA, a Geneva-based asset manager, say U.K. growth is too strong for stocks to be derailed. The economy will expand 2.6 percent this year, almost double the rate for the euro area, forecasts show. Global growth will be 2.9 percent, economists estimate.
?Unless there is a significant upset in the results, it?s very likely that there will be a relief rally after the elections,? Baring, who kept his U.K. stocks, said by phone. ?In the end, the exposure to the top 100 companies in the U.K. is a global-growth play and provided you?re constructive on global growth, the FTSE 100 is a great way to get exposure.?