The U.K. election could give Boris Johnson the ammunition he needs to secure a Brexit deal, sending a basket of undervalued domestic stocks soaring.
British politics remains unpredictable, as the last election and the 2016 European Union referendum demonstrate, but the opinion polls point towards a Johnson victory and a solid Conservative majority. In such an outcome Johnson would reheat his “oven ready” Brexit deal with plenty of support for it to pass through Parliament.
It was something of a dress rehearsal on Oct.11 for the long-awaited (and still not definite) Brexit deal. As Britain was careening towards a no-deal Brexit, Johnson and Irish leader Leo Varadkar made an unexpected breakthrough. The domestically-focused
FTSE 250
soared 4.2% in a single day—the largest daily gain since 2010, while the
FTSE 100’s
U.K.-facing companies also climbed. British banks led the way as shares in the
Royal Bank of Scotland
(ticker: RBS:UK) and
Lloyds Banking Group
(LLOY:UK) both rose 12%.
U.K. home builders, weighed down by more than three years of Brexit uncertainty, also rallied on Oct.11 on the prospect of no-deal being off the table.
Persimmon
(PSN.UK) climbed 11%,
Barratt Developments
(BDEV: UK) rose 11.5% and
Berkeley Group Holdings
(BKG:UK) jumped 8.5%. Of course, Johnson agreed to a deal with Brussels but was unable to win the support of British MPs before the Oct.31 Brexit deadline, leading to Thursday’s election.
All these stocks have edged higher in the days leading up to the election as the polls become more confident of a Conservative win and could climb further come Friday.
Since the election was called last month Persimmon has gained more than 11%, along with
British Gas
owner
Centrica
(CNA:UK), while
BP
(BP:UK) led the decliners.
Russ Mould, investment director at
AJ Bell,
said value stocks and domestic plays had performed well in the run-up to Thursday’s vote. “If the combination of higher government spending and some form of resolution for Brexit comes to pass—and that remains an ‘if’—then cyclical growth could be easier to come by here and frankly cheaper to buy on a valuation basis here in the U.K.,” he said.
That may explain why Persimmon, hotelier
Whitbread
(WTB:UK), broadcaster
ITV
(ITV:UK) and LLoyds all rank among the FTSE 100’s 10 best performers “since the race to 10 Downing Street began last month,” he added.
Colm Harney, U.K. equity analyst at Sarasin & Partners, said the pound, along with domestic stocks, would rally in the event of a strong Johnson win. “As a result, large-cap U.K. domestically-focused names would benefit,’’ he said, including Lloyds, Barratt,
Tesco
(TSCO:UK), and
Legal & General.
(LGEN:UK)
The pound has moved higher over the past week reflecting the market’s confidence in a Johnson win, which could also lead the currency towards $1.40, according to analysts. However, a stronger pound would hurt the FTSE 100’s big international earners, which have enjoyed a weak sterling since June 2016.
In the less likely event of a Labour majority and a Jeremy Corbyn-led government, domestic stocks would fall. The biggest losers would be those targeted by Corbyn’s nationalization plans—
Royal Mail
(RMG:UK)
BT Group
(BT.A:UK) energy supply networks
National Grid
(NG:UK) and
SSE
(SSE:UK) and water companies.
A hung parliament, in which no party reaches the 326 MPs needed for a majority, could see stocks fall as uncertainty remains and the prospect of a no-deal Brexit returns.
