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Yesterday (22 May), the Prime Minister surprisingly announced that the UK would head to the polls in five weeks’ time. Historically, general elections do have an impact on the FTSE 100, so here’s my game plan.
All about expectations
To begin with, it’s important to note that the market reaction isn’t geared around who wins. What really matters is the amount of uncertainty on election day.
For example, if the polls over the next few weeks show a clear party in the lead, there won’t be a huge surprise on polling day if this proves to be the case. In theory, the stock market factors in all current information. Therefore, there shouldn’t be a huge move in this case.
However, if the polls show that things are super-tight, then we could see a more volatile reaction. If this turns out to be a hung parliament (where no single party has enough votes), this would likely see the stock market initially fall. Again, this is due to the uncertainty of not knowing what will happen.
An area I’m focused on
The way I can build my hit list is less about the short-term move on election day and more about the policies that could be implemented in coming years.
For example, any party will have a focus around helping the property sector. Therefore, I’ve added Taylor Wimpey (LSE:TW) to my list. Over the past year the stock’s up 16%. However, the FTSE 100 homebuilder has endured a tough couple of years.
Rising interest rates and the UK cost-of-living crisis has caused demand for builds to weaken. People struggled to get affordable mortgages.
The tide finally seems to be turning. At the latest AGM in April, management commented that on “continued market stability supported by good mortgage availability and sustained customer confidence”.
Clearly, the party in government will be keen to ensure that this confidence remains. Help could range from stamp duty cuts for buyers or even subsidies for Taylor Wimpey tied to hitting certain targets. Either way, I think the stock could outperform during this period.
Of course, there’s a risk that interest rates (and mortgage prices) stay higher for longer. This relates to the actions from the Bank of England, not the government.
More sectors to consider
There are other areas that I’m adding to my hit list. This includes some pharmacuetiucal companies that should benefit from increased investment in the NHS. Further, I’m thinking about adding some financial services companies that could do well on advising clients to any changes in tax that could result from the election.
Ultimately, I’m getting my ducks in a row now, ahead of the election. As things unfold on the campaigning front, I’ll be able to shorten my list and then will look to buy the stocks shortly before election day.