Conservative Election Win Should Boost Lagging UK Stocks

– Polls Are Calling for a Conservative Majority in U.K, but Advantage Is Narrowing

– Another hung Parliament Almost as Bad as a Labor Win; Postpones Brexit Action

If you’ve been around Wall Street long enough, no doubt you’ve heard many elections called critical or important for the market. However, in the United Kingdom parliamentary elections tomorrow, Dec. 12, will be generationally determinant, and not just for the British.

Conservative Election Win Should Boost UK Stocks

I see the battle between the Conservative (Tories) and Labor parties as a life and death struggle for the soul of the U.K., and the country’s long-term well-being rides on the results.  On the subject of the European Union, the U.K. is as fractured a polity as our own red/blue state divide.  I’ll state my bias:  If the Tories win, buy the U.K. If they don’t, stay away. The U.K. will be much better off in the long run outside the E.U. and its overbearing, often inefficient and undemocratic market directives, mainly cooked up by unelected and out of touch mandarins and policy officials in Brussels. 

One need only look at the EU’s anti-trust approach: mergers and acquisitions are scrutinized not for the effect on the end consumer—common sense—but for the effect on rivals. Puzzling. 

Conservative Election Win Should Boost UK Stocks

The E.U. was a great idea at the start, as a way to bring down barriers to trade and the movement of capital (both human and investment), and it still has value as a unifier on a Continent that has seen too much war. The euro might have worked better if begun with only a few synchronized national economies. However, the E.U. has become ungainly and unable to simultaneously serve all the widely-varied interests of a 28 country membership, whose levels of economic and political development can differ in important ways. It’s no coincidence that the “leave” desire has gained a foothold in other countries. 

Thursday, the polls close at about 5 pm ET in the U.S. By the time U.S. markets open Friday there should be indications of the winner.

Currently, the Conservative Party of Boris Johnson has about 43% of the vote, according to the latest polls and Labor 34%. My view is if the Conservatives win, there will be a good chance that policies will be enacted that are pro-economic growth.  However, a Labor victory, with Jeremy Corbyn as Prime Minister and Labor’s dirigiste bent, there likely lies only stagnation—at best.

Anything could happen, given how wrong the polls got the Brexit referendum in 2016, The Tories do look to win, but it is not definitive. Indeed, in recent weeks, there has been a narrowing of the gap between the Conservatives and Labor party totals. The Wall Street Journal reported Wednesday that:  ahead of Thursday’s vote, some opinion polls have showed Mr. Johnson’s lead narrowing as attention has turned toward more traditional issues such as housing and health care, political analysts say.

Given these caveats, below is my handicapping of what might happen to U.K. stocks on the various scenarios.  The following link lists some of the (numerous) U.K. equity exchange traded funds readers could use to invest in the country—or not: https://etfdb.com/etfs/country/united-kingdom/.

Here’s some background on the FTSE 100 index, the country’s best-known index, containing most of the U.K.’s biggest publicly-traded companies.  In short, the Footsie, as its dubbed, has effectively done nothing for a while. In 2019, it is up about 11% in dollar terms, compared to about 25% for the Standard & Poor’s 500 index. It’s worse over the past 60 months, 11% vs 55% respectively. The Footsie’s forward price/earnings ratio is down to less than 13 times from 16-17 times three years ago.

Conservative Election Win Should Boost UK Stocks

The U.K. market is up 10% in last few months in anticipation of a Tory win but that only brings it back to May levels.   There could be a some profit-taking right after a Tory win but ultimately the UK stock market will go higher. Beyond Brexit, there are many election issues at hand for Britons, such as health care, infrastructure repair, law and order and the economy.  But for investors it’s really about Brexit.

For the next 48 hours or so, the U.K. stock market has essentially become a binary bet.

What are the latest polls indicating:  According to the latest YouGov MRP poll, the Conservative predicted majority has been cut down to 28 seats from 68 seats two weeks ago (in a 650 seat Parliament), with Labor closing the gap.

What happens in a clear Tory majority? With a majority government, Boris Johnson, the presumed Prime Minister, will have the kind of leverage the U.K. didn’t have before.  The E.U. used Britain’s divided government against it to get the best possible deal for the E.U., but not so good for the U.K.  Look for Boris to apply the Brexit squeeze. Stocks and bonds should rise.

What happens with a clear Labor majority? The Labor party has said that it wants to renegotiate Johnson’s previous proposed Brexit deal and put it to another public vote. The Labor party is divided on Brexit, starting right from the top, Jeremy Corbyn, the presumed Labor PM has in the past criticized the U.K.’s membership in an organization that he considers too market oriented. 

Expect the U.K. stock market to fall if Labor wins a clear majority. Labor would look at renationalizing industries, such as telecomos, that went private over the past forty years.  One savvy London-based money manager I know, a Yank who’s based his hedge fund in London for many years, said this: If Labor wins, it’s likely I will have to move my business back to the U.S.  This is a person who isn’t given to emotional decisions but has based his successful career on disciplined analysis.

What moves should you make in each case?

If the Tories win, long term the U.K. stock market should improve. One way to play it easily is through the use of those ETFs.  If Labor wins, I don’t see how the stock market can advance and exiting U.K. stocks seems warranted. 

Where I could be wrong:  Labor wins and renationalizes various industries.

Bottom Line:  A Tory victory, currently mostly likely, looks like a long term buy signal.

Prior Signals

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