Big investors are warming to Britain after a landslide election win for its new Labour government but remain wary of placing long term bets until Prime Minister Keir Starmer can convince them his economic growth plans are credible.
Sterling , the strongest major currency against the dollar this year, nudged higher on Friday when the scale of Labour's victory became clear. The UK-focused FTSE 250 share index (.FTMC), which has outpaced the more global FTSE 100 year-to-date, rose to its highest since April 2022.
But investors said Labour still needed to revive long-term confidence in UK markets that have struggled since 2016's Brexit vote and the chaos wreaked by Conservative former Prime Minister Liz Truss' 2022 mini-Budget.
Left-leaning Labour has pledged to upgrade Britain's creaking infrastructure and solve a housing shortage while keeping spending tight as the UK's tax burden approaches an all-time high.
But credit rating agencies and Britain's lenders in international bond markets are twitchy about public debt that is expected to exceed 100% of gross domestic product.
"They have to walk a tightrope between economic growth and government debt. We have to see if debt issuance is going to rise, and if the economy can expand at a rate where extra borrowing is deemed acceptable," said Sheldon MacDonald, chief investment officer at UK asset manager Marlborough.
MacDonald said he had a neutral outlook on UK stocks but was slightly positive on gilts because of expected Bank of England rate cuts.
After years of relentless outflows, the combined market value of companies in the broad FTSE-All stock index(.FTAS) , at 2.4 trillion pounds ($3.07 trillion), is below that of individual U.S. tech stocks like Apple (AAPL.O) and chipmaker Nvidia (.NVDA.O).
STABILITY, THEN WHAT?
After Rishi Sunak conceded defeat to Labour early on Friday and resigned as party leader, the Conservatives were set to choose their sixth leader since 2016 following years of infighting over Britain's post-Brexit future.
Investors hope Starmer and his incoming finance minister, former Bank of England economist Rachel Reeves, will provide more stable leadership as well as predictable tax and trade policies.
"Investors in New York or Hong Kong would have read the headlines and found it easy to say why bother, it's a basket case," said Toby Gibb, head of investment solutions at fund manager Artemis.
"What (the election) does is relieve that uncertainty, it allows overseas investors to invest with more security."
In one positive sign, sterling on a trade-weighted basis is back at levels last seen before the Brexit vote.
Gibb said he expected the pound to stay strong and was bullish on UK stocks.
Other investors were staying cautious.
"We know that a general incremental improvement can come from political stability but we don't know what changes are going to happen," said Janus Henderson European equities portfolio manager Tom O'Hara, whose UK exposure is below Britain's share of MSCI's broad European index (.dMIEU00000PUS).
"You need something more tangible," he explained, "such as which companies are going to benefit from which policies."
Britain has not grown faster than 2% a year on a regular basis since before the 2008 global financial crisis.
Ben Mackie, fund manager at UK-based Hawksmoor Investment Management, said he was also not buying into a UK growth theme.
"The UK stock market and economy face big structural issues," he said, adding that outflows from UK equity funds had been "horrendously negative."
UK business investment is ranked 28th among 31 OECD economies, foreign direct investment has faltered and workplace productivity is weak.
British pension funds and insurers have slashed the share of UK stocks in their portfolios to about 4% from 50% in 2000 according to advisory group Ondra.
In June, even as polls moved to predict Labour's historic victory, investors pulled $5.9 billion out of UK equity funds, marking the 44th consecutive month of outflows, LSEG data showed.
But in one positive sign, big U.S. and Asian investors were asking questions about the UK for the first time in years, said UBS head of European equity strategy Gerry Fowler.
"Interest has become more widespread," he said. "But that enthusiasm isn't likely to be translating into really strong performance in the near term. I don't think much money has moved in yet."
($1 = 0.7823 pounds)
