(Bloomberg) -- U.K.-focused stocks are higher on optimism that Boris Johnson's Conservative Party has a better chance of winning a majority in next month's election after the Brexit Party said it wouldn't fight them. But market strategists say it's not over yet.
The market reaction to Monday's announcement was "solid rather than spectacular," Raymond James strategist Chris Bailey said by email, noting that the Brexit Party could still hurt the Conservatives by running in seats won by Jeremy Corbyn's Labour Party last time around.
The domestic FTSE 250 benchmark has held gains of about 0.9% since Farage's speech, while some stocks considered most-exposed to the U.K. economy jumped on the news. Lender Royal Bank of Scotland Group Plc and homebuilder Persimmon Plc rose 4% and 3.9% respectively on Monday.
"There is now a meaningful amount of optimism being priced in to U.K. assets, particularly sterling and the FTSE 250," said David Holohan, head of equity strategy at Mediolanum. "That does raise the risk of a negative market development to any political curve balls which could still emerge in the coming days and weeks."
Broadly speaking, it comes down to the pound. In mid-October the correlation between U.K. midcaps and the British currency reached its highest level since the Brexit referendum and has remained there since. Sterling, which jumped as much as 1% on Monday's news, has now erased the majority of those gains.
Here's what other strategists and investors had to say about the developments.
Aberdeen Standard Investments, Andrew Milligan
The announcement from Nigel Farage has altered the election calculations at the margin and hence had a noticeable impact on sterling and a ripple effect through other asset classes, for example the relative attractiveness of domestic versus external facing stocks.
Lack of a major movement in sterling versus other currencies, or more broadly U.K. financial assets versus their international counterparts, since the campaign was announced suggests that few new positions have yet been placed by global investors. Markets are still in watch-and-wait mode.
Liberum Capital Ltd., Andrew Coury
Yesterday's rally shows that the fears of a Corbyn government still linger. The outcome of the election is not clear cut as Conservatives will need to target Labour leavers to comfortably secure their majority.
Should the Conservatives win a majority, expect domestics to rally alongside sterling, including banks, consumer discretionary, house-builders and real estate.
Allianz Global Investors, Marcus Morris-Eyton
Would still expect to see a strong relief rally if Boris Johnson is able to win a majority. The market is pricing in a reduced probability of no-deal Brexit occurring, but it is still far from clear as to whether the Conservatives achieve a majority government.
London and Capital Asset Management Ltd., Roger Jones
Small uptick in sterling to news looks correct as it is likely to increase the probability of a Conservative majority by a small proportion. The result still looks to be in the balance.
Investors have become cautious on polls after the Brexit referendum and Trump election. Suspect there will be a wait-and-see approach by investors until the outcome becomes clearer.
U.K. small-cap stocks look interesting after lagging mid-cap domestics. With the tail risk of no-deal Brexit removed, a Conservative majority would boost U.K. smallcaps and a hung parliament would have minimum fundamental impact.
Peel Hunt, Ian Williams
The reasonably measured equity market reaction to Farage's announcement suggests a Conservative majority was already at least half priced-in.
There has been a decent bounce in mid-caps, but nothing overdone. This reflects increased betting on an overall majority.
While consensus is generally that sterling could reach $1.35 if there's Conservative win followed by Brexit on Jan. 31, "I think that might be overdoing it" given broadly soft growth and jobs data, last week's tone from the Bank of England and the overhang on markets from trade wars.
Makor Capital Markets SA, Stephane Barbier de la Serre
The current stamina -- possibly exuberance -- of U.K. stocks at this juncture is likely more linked to ongoing all-in risk-on momentum on European stocks in general than to idiosyncratic factors.
Another hung Parliament on Dec. 13 remains the most likely scenario, and should that scenario occur, U.K. stocks and currency would then face a pretty harsh and fairly indiscriminate correction.
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