BlackRock Overweight on UK Stocks, Sees Labour-Driven Stability

BlackRock Overweights UK Stocks as Labour's Landslide Win Promises Political Stability and Economic Growth

By Bill Bullington

7/10, 12:33 EDT

Key Takeaway

  • BlackRock is now overweight on UK equities, citing attractive valuations and political stability following Labour's election victory.
  • Hedge funds are betting on a stronger pound, with net long positions at their highest since April 2018, driven by anticipated economic stability.
  • The Labour win may positively impact the UK Emissions Trading Scheme (ETS), potentially leading to higher UK Allowance prices due to expected policy changes.

UK Equity Market Attracts Offshore Investors

The UK stock market is poised to attract offshore investors following Labour's landslide election victory, which is expected to usher in a period of political stability. Strategists at BlackRock Investment Institute have expressed optimism about the UK equity market. "We are now overweight UK equity market," said Wei Li, BlackRock’s global chief investment strategist, during a press briefing in London. Li emphasized that the valuation of UK stocks has been attractive for some time, but the recent political stability could act as a catalyst for international sentiment to improve.

UK stocks, which have been unpopular for years, are now seen as a haven for investors facing heightened political risks in Europe and the US. The FTSE 350 index has outperformed most comparable European indices since early April, driven by cheap valuations and an improved economic outlook. According to Bank of America’s June fund manager survey, the UK, alongside Spain, was named the most favored European equity market. Globally, underweight positions on UK stocks have reached a one-year low, with a net 12% of survey respondents still underweight on the country.

Vivek Paul, UK chief investment strategist at BlackRock, highlighted the perception of market risk as a key factor. "Whether or not some of the macro dynamics shift is something that we’re going to have to learn as time goes on," Paul noted.

Hedge Fund Bets on Strong Pound

Hedge fund bets for a stronger pound surged to their highest level in over six years ahead of the UK election, as investors anticipated that a Labour victory would bring political and economic stability. Net long pound positions held by leveraged funds reached their highest level since April 2018 in the week leading up to the July 4 vote, according to the latest CFTC positioning data. These speculative bets increased as the pound rallied to its strongest against the dollar in nearly a month and hovered close to a two-year high versus the euro.

"The promised continuity in the UK’s fiscal rules had contrasted with the potential fiscal and policy changes seen emerging from the results of elections elsewhere," said Michael Metcalfe, head of macro strategy at State Street Global Markets. The pound posted its best winning streak against the dollar in four years last week, gaining for seven consecutive days as Labour’s overwhelming majority signaled a period of calm in UK politics, which many in the market expect will be positive for UK assets.

Metcalfe also noted that the view of the UK as a "policy safe haven" was improving sentiment for the pound among institutional investors. Flows tracked by State Street indicate that buy-and-hold investors have been reducing their long-held underweight pound positions, with short positions held by asset managers shrinking to their smallest in over a year, according to CFTC data.

UK ETS Market Sentiment

The Labour Party’s victory in the UK general elections could positively impact market sentiment for the UK Emissions Trading Scheme (ETS). According to Citi, the new government could increase the likelihood of the UK ETS Authority publishing a response on the introduction of a Supply Adjustment Mechanism (SAM) by the end of the year, with the earliest implementation date being 2025. This, coupled with an expansion of the UK ETS to other sectors, could risk over-tightening the system in the coming years, supporting UK Allowance (UKA) prices.

The latest reform of the UK ETS bolstered the system but did not include a stabilization mechanism akin to the EU ETS Market Stability Reserve (MSR). In 2023, the UK ETS Authority unveiled a comprehensive package of reforms to support the market's effective functioning, including aligning the UK ETS cap with Net-Zero by lowering it by 30% to 936 Mt over the 2021-2030 period. However, the UK ETS Authority remains inclined to implement a SAM to address any imbalances, although details are yet to be finalized.

Citi estimates that the UK ETS will shift into large annual deficits from 2026 onwards, stretching over 20 Mt from 2028 onwards, which should completely erode the total number of allowances in circulation (TNAC) by 2030. The UK ETS has consistently recorded hefty annual surpluses since its establishment in 2021, with an estimated TNAC of 48 Mt as of 2023. Citi projects another 14 Mt surplus in 2024 and another 7 Mt surplus in 2025.

Street Views

  • Wei Li, BlackRock (Overweight on UK equity market):

    "We are now overweight UK equity market. Valuation is attractive — it has been the case for a while — but now we have a catalyst of potentially perceived political stability that could act as a trigger for international sentiment to warm up."

  • Vivek Paul, BlackRock (Cautiously Optimistic on UK market risk perception):

    "In terms of the point around the UK more broadly, the one we’re highlighting right now is this idea of the perception of market risk. Whether or not some of the macro dynamics shift is something that we’re going to have to learn as time goes on."