Conservative election win: market reaction

The speculation is over – Boris Johnson has won the Conservatives the largest parliamentary majority since 1987. Brexit now seems a certainty by the end of January and the haze of concern over Labour’s plans for business and re-nationalisation has gone. The pound has surged against the dollar and the euro, which, in general terms, is a positive for domestic-oriented companies – and that’s what we’re seeing in the market so far….

To kick off, it looks like brokers were caught on the hop this morning – although shares in both AJ Bell (+7.4%) and Hargreaves Lansdown (+7.5%) are some of the sharpest risers in early trading this morning.

FTSE 100 – relief for housebuilders and utilities

Note that prices are moving quite wildly this morning – so what we’re seeing now may settle down later.

The FTSE 100 is currently up around 1.7%, with domestic stocks leading the charge, but international names largely unmoved.

Unsurprisingly – given the Conservatives’ promise of continued stimulus for new homebuilding – Taylor Wimpey (+13.2%) and Persimmon (+11.2%) are leading the FTSE 100 movers early doors – with Berkeley and Barratt not far behind (both up 9.5%).

But the big relief seems to be among the utilities – a sector that faced an uncertain future under a potential Labour government. SSE (+10.2%) leads the pack, followed by United Utilities (+8.9%), Centrica (+8.1%) and Severn Trent (+7.2%). National Grid – another company on the re-nationalisation list – has seen its shares bounce by 6.1%. Meanwhile, shares in BT, which was facing the possibility of having Openreach taken off its hands, are up 7.1%.

UK banks are also benefiting: Lloyds shares are up 7.2% and Royal Bank of Scotland is up 11%. It’s a big positive reaction to prospects for the UK’s domestic economy.

On the flipside, a number of blue chips are unmoved – especially those with an international focus and won’t benefit from the rise in the pound. Among them are oil stocks like BP and Royal Dutch Shell pharma groups like Glaxo, Astrazeneca and Hikma, as well as big names like Rentokil Initial, Reckitt Benckiser and Rolls Royce.

The mid-cap bounce is on

At the time of writing, the FTSE 250 is up by 4% – its biggest jump in a decade. It is a clear breakout as money floods back into UK stocks:

Nearly 90% of the companies listed on the FTSE All-Share are up this morning. Is this the start of a prolonged upwards move for smaller UK-focused companies? Time will tell but, regardless of your political views and thoughts on Brexit, a good deal of uncertainty has been removed. It’s a comprehensive reaction to today’s election result.

On the FTSE 250, some of the big winners this morning have been the country’s public transport companies. Stagecoach (+11.2%) and Go-Ahead (+11.0%) lead the mid-cap list – as the prospect of slashed travel fares under a Labour government has departed. Trainline (+9.2%) is another travel stock feeling that relief.

Construction, public services and infrastructure groups have also been beneficiaries, perhaps with the prospect of more government investment on the cards. Among them are Serco (+10.0) and Pennon (+10.1%) and the builders Redrow, Bellway and Crest Nicholson.

Some big high street names are also fairing well on the Tory win. Marks and Spencer (+9.3%), Dixons Carphone (+8.4%) and Bamp;M (+8.3%) are all up there.

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Don’t forget, last week we speculated about how a Contrarian Quality/Value strategy could be a useful strategy to play a Conservative win, and that seems to be working out okay: A Boris boom or Corbyn crash? How will the election result move the stock market?

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Never a better time to be a UK small cap investor?

Will a Conservative win be the catalyst for a new run for UK small-caps? Our own Paul Scott thinks so (as he explains in today’s Small Cap Value Report). We also covered some of the potential ways to play a small-cap renaissance in this article last week: High yielding small-caps that could benefit from a Boris Brexit bounce. So far, the small cap indices are showing promising signs…

There is a 3.2% rise on the FTSE SmallCap (ex ITs) this morning. Again, those shares with exposure to British consumers or the domestic economy in some way have been the fastest movers. DFS Furniture (+11.5%) is setting the pace, followed by the steelwork group Severfield (+11.1%), the estate agency Foxtons (+10.7%) and Goco (+8.9%), the company behind the price comparison website GoCompare.

It’s a similar story over on the AIM 100 – up 1.9% this morning – where some of the fastest movers have been domestic-facing names. Aggregates group Breedon had been tipped to be a winner from extra government spending on infrastructure, and its shares are up 11.9%. Others on the move have been Numis (+10.3%), Hurricane Energy (+8.7%) and Dart (+7.0%).

Overall then, the Conservative win has been welcomed by the stock market – and by UK-oriented shares in particular. Is this just a relief rally as the veil of uncertainty starts to lift or could this be the trigger for a small-cap bounce with much longer to run. What do you think?

We’ll be keeping a close eye on how the market reacts over the coming weeks.

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