As political unpredictability increases in the US and other parts of Europe, investors are turning to UK markets as a possible refuge. This may be a dramatic turnabout for a nation that had seemed to lose its allure to international capital.

The British center-left Labour party won a resounding election victory last week, raising hopes for more stable policies and enhanced trade with the EU to revive the faltering economy following the Brexit referendum in 2016.

As everything is going on, investors are frantically speculating about what may happen to the markets if former US President Donald Trump were to retake the White House. Meanwhile, legislative deadlock in indebted France has brought back flashbacks of past euro zone crises.

The economy of Britain is starting to strengthen, and some bankers anticipate a rebound for the UK stock markets, which were severely damaged by persistent selling during the turbulent years under the Conservative regimes.

The world’s largest asset manager’s research division, BlackRock Investment Institute, declared on Tuesday that it was optimistic about UK equities, which might signal a change in sentiment among influential international organisations that have been less enthusiastic about Britain since 2016.

However, even those transferring money into the UK issued a warning, saying that unless incoming Prime Minister Keir Starmer implements a strong strategy to raise living standards without adding to the already burdened nation’s financial problems, the country’s attraction as a sanctuary may not last long.

“The (UK) election improves things at the margin and the uncertainty on Europe driven by France means there could be a honeymoon period for Britain for a bit,” said Pictet Wealth Management chief investment officer César Pérez Ruiz.

“The market is going to be asking for more detail on fiscal spending and (Starmer) hasn’t given us a lot of information.”

Due to political risk in France, Pérez Ruiz stated he sold some European corporate debt and purchased UK counterparts; however, he may not keep the position for more than six months.

Since the July 4 election, investors have continued to withdraw money from UK equities funds and stock market trackers, according to daily statistics from information provider Lipper.

But there are also some encouraging indicators.

Potential big offers from companies like Shein and De Beers are expected, following a lack of London listings. Some bankers anticipate that the UK market will rebound more broadly in the upcoming year. In an effort to promote more initial public offerings (IPOs), the UK market regulator expedited a number of listing regulation adjustments on Thursday.

In the year to mid-May, London’s share of European IPO volumes dropped to only 1%, from 28% at the same period in 2021 when the market was booming.

“The UK is a relatively more positive place than other regions, for a couple of reasons,” Peel Hunt equities capital markets head Brian Hanratty stated.

“I don’t want to say it is like a dam breaking.”

He said he has seen firms hosting meetings with early-stage investors and talking more about initial public offerings (IPOs) with accountants.

Large investors are also becoming more upbeat.

If Labour restores EU trade ties and boosts corporate spending, “we see a virtuous cycle taking hold,” stated Salman Ahmed, head of multi-asset at Fidelity International. Despite some funds expanding their exposure, Fidelity maintains a neutral stance on Britain.

The UK firms that Matt Evans, the portfolio manager at NinetyOne, works with are preparing investment initiatives that they had postponed during the Conservative administration.

Concerns about the UK’s weak public finances persist as state borrowing gets closer to 100% of GDP and the market upheaval caused by Conservative Prime Minister Liz Truss’s poorly financed mini-Budget in 2022 is still vivid in people’s minds.

Labour hopes to draw in private capital for homes and infrastructure, which may accelerate growth in 2024 over the 0.7% predicted by Reuters pollsters.

Expected rate cuts from the Bank of England provided short-term support for gilts, but until Labour demonstrated an unproven commitment to fiscal restraint, the UK was not a debt market refuge, according to James Athey, fixed income manager at London investment company Marlborough.

Even if it is now below 2023 highs, the yield on Britain’s 10-year bond has increased by 60 basis points this year to 4.15%, trailing that of its counterparts in the US and Germany.

Mark Dowding, chief investment officer of BlueBay Asset Management, stated that as long as inflationary pressures persist, he will not expand his exposure to the UK.

London’s FTSE-100 index, which is priced at a price-to-earnings ratio over 50% lower than that of American companies, has lagged global benchmarks this month, which is another indication that prudence is warranted.

“The (UK) risk-reward is pretty favourable,” BNP Paribas head of equity strategy Dennis Jose said.

But as for capital coming back? “Not yet. It will take a little more time.”

(Adapted from Investing.com)

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