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The U.K. election is going to be quite difficult to predict and investors are bracing for a potential market shake-up once the results are out. If the Conservatives flop in the Jun 8 vote, there could be a selloff for U.K. equities or even for markets around the globe. But if they win, the markets will move north, leading to a smooth Brexit. Retailers focused on Britain could also benefit from a strong Tory showing in the election.
However, opinion polls have called for increasingly narrow margins for the Tories amid a series of political missteps by Prime Minister Theresa May. For now, let’s hold our breath and eagerly wait for the election results on Jun 9.
Why is the U.K. Having an Election Now?
U.K. voters will cast their votes in an out-of-cycle general election called by May, the leader of the Conservative Party. This April, when it became clear that the Tories were enjoying record support in opinion polls, May called for an election. May feels that the Tories will increase their slim majority of 17 seats in the House of Commons. This in turn will reduce her dependence on members of parliament who want a “hard Brexit”, than what she does. The vote will also make the Parliament more united, strengthen their negotiation stance with Brussels and curb opposition’s efforts to jeopardize the government’s plan for the so-called Brexit.
May has said that only she can provide a “strong and stable” leadership in order to secure a smooth exit from the EU. Her opposition, Labor Party leader Jeremy Corbyn, argued that May’s approach toward Brexit is “reckless”. In fact, recent opinion polls suggest that May’s support has declined after some policy and campaign slip-ups. The race has become tighter between the two major parties, with the Liberal Democrats, the Green Party, the Scottish National Party and others having significant roles to play.
What Do the Polls Indicate?
What looked like a calculated race has become something increasingly unpredictable. Going by the polls, May is still on track to win, but it won’t be the landslide victory she was hoping for. As per the Telegraph’s poll tracker, Conservatives are just 7 percentage points ahead of the Labor party, which is considerably less when compared to the 20-percentage point lead the Tories had enjoyed at the start of election.
But, a constituency-by-constituency model put together by YouGov research for The Times newspaper last week showed that the Tories could lose 20 seats and put an end to their parliamentary majority once and for all. On the other hand, the opposition Labor Party could add 28 seats. The research, which modeled results on a voting-district basis, showed that Conservative Party’s tally could be 16 seats below the required 326 seats to be able to govern alone, resulting in a “hung parliament”.
The Best-Case & Nightmare Scenario for Stocks
Let us now look at the most likely poll results and how it would impact U.K. companies:
Large Conservative Majority – Best Outcome for Equities
Strategists believe that if the Conservatives win a 50-seat majority, it will dilute the influence of the “hard Brexit” Tory members of the Parliament and will result in more friendly talks with Brussels. This will strengthen May when negotiating the exit with other European leaders. Such reduction in political turmoil will boost the pound. A stronger pound will curb consumer price inflation and support domestic consumption. But, exporter’s competitiveness will take a beating. According to TradeMade, sterling could climb back to $1.2989 if Tories wins the 326 seats needed for a majority. However, if the majority is slimmer, then the sterling may dip to $1.28.
With pound gaining ground, likely winners will be domestically focused retailers in Britain like Marks and Spencer Group Plc (MAKSY - Free Report) , according to Deutsche Bank AG (DB - Free Report) . Exposed-focused retailer those are sensitive to sterling strength, however, may land up in the losing camp. Prominent among them being ASOS plc. Export-oriented miners and energy companies including BHP Billiton plc and BP plc (BP - Free Report) also are likely to be affected. Moreover, if the Conservative party wins majority of votes, it will help to shore up support for global indices as per Cieszynski.
Small Tory Majority – A Wasted Exercise
A less than 50-seat majority for the Conservatives or a hung Parliament might turn out to be the biggest risk for the financial markets, according to analysts. This will increase the influence of the hardline Brexiteers in May’s party, which will make a successful Brexit deal less likely and create an uncertain outlook for the U.K. economy. As a result, pound might fall putting pressure on stocks that have significant exposure on the U.K. consumer and housing market.
Among the most affected companies would be retailers Kingfisher plc (KGFHY - Free Report) as well as real-estate investors Hammerson and Intu Properties, according to Deutsche Bank. Some of the U.K.-focused banks could well be affected such as Lloyds Banking Group PLC (LYG - Free Report) and Royal Bank of Scotland Group PLC . They may underperform their globally exposed peers like HSBC Holdings plc (HSBC - Free Report) and Standard Chartered PLC.
Cieszynski, in the meanwhile, believes that “the impact on markets outside the U.K. is likely to be neutral, as this has been expected for some time”.
Labor Led Majority – Worst-Case Scenario
A coalition government led by Jeremy Corbyn and his Labor Party will shake things dramatically for several U.K. companies. The Labor party has pledged to introduce an “immediate emergency price cap”, which will ensure household energy bills below £1,000 a year. The party also wants to nationalize and take charge of the supply networks. The Conservatives have also at the same time decided to bring in price cap on tariffs, so utilities will be adversely affected no matter who wins. Centrica PLC (CPYYY - Free Report) and National Grid plc (NGG - Free Report) fall in the aforesaid category.
Labor Party’s plan to take the U.K.’s railways back to public ownership might hamper the proceedings of companies such as Stagecoach PLC, Go-Ahead Group PLC, National Express Group PLC and Firstgroup PLC. But, Corbyn’s vow to build a minimum 100,000 new council and housing-associations could provide boost to homebuilders like Bovis Homes Group PLC , Crest Nicholson Holdings PLC , Taylor Wimpey , Persimmon PLC and Barratt Developments PLC.
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UK General Election: The Best & Worst for Stocks
The U.K. election is going to be quite difficult to predict and investors are bracing for a potential market shake-up once the results are out. If the Conservatives flop in the Jun 8 vote, there could be a selloff for U.K. equities or even for markets around the globe. But if they win, the markets will move north, leading to a smooth Brexit. Retailers focused on Britain could also benefit from a strong Tory showing in the election.
However, opinion polls have called for increasingly narrow margins for the Tories amid a series of political missteps by Prime Minister Theresa May. For now, let’s hold our breath and eagerly wait for the election results on Jun 9.
Why is the U.K. Having an Election Now?
U.K. voters will cast their votes in an out-of-cycle general election called by May, the leader of the Conservative Party. This April, when it became clear that the Tories were enjoying record support in opinion polls, May called for an election. May feels that the Tories will increase their slim majority of 17 seats in the House of Commons. This in turn will reduce her dependence on members of parliament who want a “hard Brexit”, than what she does. The vote will also make the Parliament more united, strengthen their negotiation stance with Brussels and curb opposition’s efforts to jeopardize the government’s plan for the so-called Brexit.
May has said that only she can provide a “strong and stable” leadership in order to secure a smooth exit from the EU. Her opposition, Labor Party leader Jeremy Corbyn, argued that May’s approach toward Brexit is “reckless”. In fact, recent opinion polls suggest that May’s support has declined after some policy and campaign slip-ups. The race has become tighter between the two major parties, with the Liberal Democrats, the Green Party, the Scottish National Party and others having significant roles to play.
What Do the Polls Indicate?
What looked like a calculated race has become something increasingly unpredictable. Going by the polls, May is still on track to win, but it won’t be the landslide victory she was hoping for. As per the Telegraph’s poll tracker, Conservatives are just 7 percentage points ahead of the Labor party, which is considerably less when compared to the 20-percentage point lead the Tories had enjoyed at the start of election.
But, a constituency-by-constituency model put together by YouGov research for The Times newspaper last week showed that the Tories could lose 20 seats and put an end to their parliamentary majority once and for all. On the other hand, the opposition Labor Party could add 28 seats. The research, which modeled results on a voting-district basis, showed that Conservative Party’s tally could be 16 seats below the required 326 seats to be able to govern alone, resulting in a “hung parliament”.
The Best-Case & Nightmare Scenario for Stocks
Let us now look at the most likely poll results and how it would impact U.K. companies:
Large Conservative Majority – Best Outcome for Equities
Strategists believe that if the Conservatives win a 50-seat majority, it will dilute the influence of the “hard Brexit” Tory members of the Parliament and will result in more friendly talks with Brussels. This will strengthen May when negotiating the exit with other European leaders. Such reduction in political turmoil will boost the pound. A stronger pound will curb consumer price inflation and support domestic consumption. But, exporter’s competitiveness will take a beating. According to TradeMade, sterling could climb back to $1.2989 if Tories wins the 326 seats needed for a majority. However, if the majority is slimmer, then the sterling may dip to $1.28.
With pound gaining ground, likely winners will be domestically focused retailers in Britain like Marks and Spencer Group Plc (MAKSY - Free Report) , according to Deutsche Bank AG (DB - Free Report) . Exposed-focused retailer those are sensitive to sterling strength, however, may land up in the losing camp. Prominent among them being ASOS plc. Export-oriented miners and energy companies including BHP Billiton plc and BP plc (BP - Free Report) also are likely to be affected. Moreover, if the Conservative party wins majority of votes, it will help to shore up support for global indices as per Cieszynski.
Small Tory Majority – A Wasted Exercise
A less than 50-seat majority for the Conservatives or a hung Parliament might turn out to be the biggest risk for the financial markets, according to analysts. This will increase the influence of the hardline Brexiteers in May’s party, which will make a successful Brexit deal less likely and create an uncertain outlook for the U.K. economy. As a result, pound might fall putting pressure on stocks that have significant exposure on the U.K. consumer and housing market.
Among the most affected companies would be retailers Kingfisher plc (KGFHY - Free Report) as well as real-estate investors Hammerson and Intu Properties, according to Deutsche Bank. Some of the U.K.-focused banks could well be affected such as Lloyds Banking Group PLC (LYG - Free Report) and Royal Bank of Scotland Group PLC . They may underperform their globally exposed peers like HSBC Holdings plc (HSBC - Free Report) and Standard Chartered PLC.
Cieszynski, in the meanwhile, believes that “the impact on markets outside the U.K. is likely to be neutral, as this has been expected for some time”.
Labor Led Majority – Worst-Case Scenario
A coalition government led by Jeremy Corbyn and his Labor Party will shake things dramatically for several U.K. companies. The Labor party has pledged to introduce an “immediate emergency price cap”, which will ensure household energy bills below £1,000 a year. The party also wants to nationalize and take charge of the supply networks. The Conservatives have also at the same time decided to bring in price cap on tariffs, so utilities will be adversely affected no matter who wins. Centrica PLC (CPYYY - Free Report) and National Grid plc (NGG - Free Report) fall in the aforesaid category.
Labor Party’s plan to take the U.K.’s railways back to public ownership might hamper the proceedings of companies such as Stagecoach PLC, Go-Ahead Group PLC, National Express Group PLC and Firstgroup PLC. But, Corbyn’s vow to build a minimum 100,000 new council and housing-associations could provide boost to homebuilders like Bovis Homes Group PLC , Crest Nicholson Holdings PLC , Taylor Wimpey , Persimmon PLC and Barratt Developments PLC.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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