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Shares surge after Tory poll win

Published 08/05/2015

The pound rose against the euro after better-than-expected General Election results for the Conservatives
The pound rose against the euro after better-than-expected General Election results for the Conservatives

Shares surged today as a surprise outright victory for the Conservatives cheered the City and dispelled expectations of weeks of uncertainty.

The FTSE 100 Index was up by more than 150 points, or over 2%, during the session, meaning Britain's biggest listed companies together added nearly £40 billion in value as energy firms, banks and estate agents all performed strongly.

However, some economists pointed to concerns about the result further down the line, particularly with the Conservatives' pledge to hold an in/out referendum on EU membership.

British Gas owner Centrica added 7% as Labour's defeat ended the possibility of an energy price freeze and tighter regulation. Analysts at HSBC upgraded the stock on the basis of "diminished political risk".

Banks were buoyed as the threat of an increased banking levy and bonus tax under Ed Miliband was ruled out.

State-backed lenders Lloyds and Royal Bank of Scotland rose by 6% and 5%.

Meanwhile retailers such as Sports Direct - up 5% - were buoyed by the fact that Labour plans to end zero-hour contracts and lift the minimum wage would not come to pass.

The mood was more broadly positive because David Cameron's smooth transition to a second term in Downing Street avoided the previously expected scenario that there would be no clear winner today, and weeks of political horse-trading to follow.

Sentiment was also lifted by the prospect of no change to tax and spending policies and the disappearance of the spectre of an uneasy parliamentary arrangement between a minority Labour government and the Scottish National Party.

Sterling rose sharply as the prospect of uncertainty faded. The pound climbed above 1.55 US dollars overnight, its highest level against the greenback since the end of February, before edging back to 1.54.

It rose above 1.38 against the euro before settling back to 1.37.

Vicky Redwood, chief UK economist at Capital Economics, said: "The result removes the risk that the economy suffers a prolonged period of political uncertainty."

Scotiabank's Alan Clarke said the result should mean "the half-finished job of closing the budget deficit and getting the Government debt burden on a downward burden can be continued".

However he said the biggest market concern over the next two years would be the prospect of an EU referendum as promised by Mr Cameron. Meanwhile, the UK looked set to face the "mother of all fiscal tightenings in about a year's time".

Andrew Wells, global chief investment officer of Fixed Income at Fidelity Worldwide Investment, said that "on the face of it" the result would be positive for sterling and Government bonds.

"However as the dust settles the change in Scotland will have to be closely followed.

"Whilst the Scottish nationalists did not campaign on a ticket of devolution, the magnitude of support for them must herald change in the future, and this will cause greater uncertainty.

"The other danger is that a slim majority, with no significant coalition could always see us back at the polls in a short period of time and markets will be wary of that situation."

HSBC economists Simon Wells and Liz Martins said the European referendum and the SNP's virtual clean-sweep in Scotland were the two big medium-term implications of the result.

"The economic implications of a possible British EU exit could be far-reaching and the BoE [Bank of England] may soon be turning its attention to the regulatory and financial stability implications of such a scenario.

"The huge gains made by the SNP once again call into question the future of the UK itself. If Scotland were to vote to stay in the EU, but the rest of the UK were to opt to leave, pressure to break up the union could increase further."

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