Halister News

(Bloomberg) -- A Tory government that’s weaker than the current one would be the riskiest U.K. election outcome for investors, according to Mike Amey, head of sterling portfolio management at Pimco Europe.

• Gilt yields look “rich” compared with those on U.S. Treasuries, he wrote in a client note Friday, adding that that view was based more on the “resilience of the economy rather than a view on the electoral outcome”
• Given the lack of market volatility and clarity, Amey said he doesn’t “believe investors are being adequately compensated to take risk associated with the outcome of the election”
  • If there is market volatility, Amey said investors are likely “better served by having scope to respond rather than by taking a view ahead of the event”
• Below are the potential market reactions to different U.K. election outcomes, according to Amey:
  • Larger Conservative Party majority in Parliament, “should elicit little market response” as it’s the central expectation
  • A Labour-led government, although unlikely, will spur currency volatility and higher yields in long-dated gilts
    • The initial reaction could be for the pound to fall as the focus would be on “looser fiscal policy and an untested government” 
    • But if the looser fiscal policy is accompanied by tighter monetary policy and a stable government, “then it is quite possible that in time the pound responds more favorably”
  • A weakened Conservative government would be the “most politically challenging outcome and would almost certainly send the pound and gilt yields lower,” Amey writes
    • Investors would likely immediately worry about a “challenge” to Prime Minister Theresa May’s leadership of the Tories
    • Concern that a greater reliance on every Conservative member of Parliament “risks a more confrontational approach to Brexit negotiations”

--With assistance from Cecile Gutscher. To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma