By Anna Isaac
A decisive victory for Prime Minister Boris Johnson's Conservative Party in the British election sent investors scrambling to buy U.K. stocks and pushed the pound to its highest level against the dollar since May 2018.
The FTSE 100 index, which tracks the U.K.'s largest companies, rose 1.9%, marking its biggest gain since February. The rally was led by gains in stocks such as house builder Taylor Wimpey PLC and Royal Bank of Scotland Group PLC. The British pound earlier climbed to its highest level since May 2018 before easing slightly to trade at $1.3380 on Friday.
Investors are betting on a significant flow of capital back into the U.K. as Mr. Johnson's resounding electoral win sets the stage for lawmakers to trigger a long-delayed split with the European Union. Britain now appears poised to leave the EU by the end of next month, removing a major uncertainty that has weighed on U.K. businesses and investors' sentiment for more than three years.
"The U.K. market looks very attractive to international investors," in part because the pound is still below historic highs, said Emma Mogford, portfolio manager at Newton Investment Management. "It's still relatively cheap and now some of the political uncertainty has been lifted."
Mr. Johnson's win and the easing of uncertainty could lead to a moderate rise in investments by businesses, according to investors and economists. But they also cautioned that the spending would remain limited unless there was swift action to secure the long-term future trade relationship with the EU. Mr. Johnson has said he would secure a new trade deal with the bloc by the end of 2020, when the U.K.'s period of transition out of the EU is up.
Still, the British pound remains below levels it hit before the Brexit referendum in June 2016, when it traded at $1.4807, adding to U.K. assets' attractiveness for foreign investors, Ms. Mogford said.
The FTSE 250 equity index, which tracks smaller companies that are more focused on domestic operations, advanced 4.3%, the most in over a year. Finance companies such as Virgin Money UK PLC and OneSavings PLC led that rally.
Utility companies, which had come under pressure in the run-up to Thursday's election as investors took note of the Labour Party's proposal to nationalize some industries, were also among the day's biggest beneficiaries.
Electricity and gas supplier National Grid PLC, water company Severn Trent, telecommunications provider BT Group, and energy supplier Centrica PLC all posted gains.
"The things that are leading the charge are exactly those stocks that were leading the fall after the Brexit referendum," said Daniel McDonagh, head of European portfolios at Nedgroup Investments. "We've been surprised by the immediate relief shown in utilities stocks."
Retailers such as Associated British Foods PLC and apparel-chain Next PLC, as well as companies in the construction business such as Persimmon PLC and Barratt Developments PLC rose.
"Those companies that rely on imports will also see a boost from a strong pound and also from improved sentiment among U.K. consumers as political uncertainty eases," said Edward Park, deputy chief investment officer at BrooksMacdonald. He pointed to the retail sector as well as the home builders, which import materials.
Another even bigger concern for investors would be the terms of a trade deal with the EU for the services sector, which accounts for a lion's share of the U.K. economy, according to Victoria Clarke, an economist at Investec.
"One of the biggest things will be to watch what regulatory and other barriers U.K. services companies will face when trading with the EU," Ms. Clarke said. "That's the major unknown for the U.K. outlook."
Caitlin Ostroff contributed to this article
Write to Anna Isaac at email@example.com
Corrections & Amplifications
This article was corrected at 1328 GMT because the original incorrectly stated Emma Mogford's and Victoria Clarke's names. Emma Mogford is portfolio manager at Newton Investment Management. "Investors Pour Into U.K. Markets" at 6.55 ET, incorrectly stated her surname as Newton in the 4th and 6th paragraphs. Victoria Clarke is an economist at Investec. An earlier version of this article incorrectly stated her surname as Shaw in the 12th and 13th paragraphs.