By Callum Keown
The U.K. election is set to give Prime Minister Boris Johnson the ammunition he needs to secure a Brexit deal, sending a basket of battered domestic stocks soaring.
As the last election in 2017 and the 2016 EU referendum demonstrated, British politics are unpredictable and the final election opinion poll this week saw the Conservative party lead cut by more than half to a 28-seat majority. However, the exit poll on Thursday night predicted a strong majority for the Tories.
If Johnson does win his predicted parliamentary majority, he would reheat his “oven ready” Brexit deal with plenty of support for it to pass.
In something of a dress rehearsal for what investors may face if Johnson wins, when he reached an understanding with Irish prime minister Leo Varadkar on October 11, boosting the chances of an EU deal on Brexit, the domestically-focused FTSE 250 /zigman2/quotes/210598417/delayed UK:MCX +0.22% soared 4.2% in a single day, the largest daily gain since 2010.
The FTSE 100’s /zigman2/quotes/210598409/delayed UK:UKX +0.52% index of U.K.-facing companies also climbed that day and British bank stocks led the way as Royal Bank of Scotland and Lloyds Banking Group /zigman2/quotes/202285510/delayed UK:LLOY +1.52% both rose 12%.
U.K. home builder stocks, 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 /zigman2/quotes/206444744/delayed UK:PSN -0.25% climbed 11%, Barratt Developments /zigman2/quotes/209812640/delayed UK:BDEV -1.36% rose 11.5% and Berkeley Group Holdings /zigman2/quotes/202576163/delayed UK:BKG +0.22% jumped 8.5%.
While Johnson managed reach a deal with Brussels in October, he was unable to win the support of British members of parliament before the Oct. 31 Brexit deadline, leading to the election this Thursday.
All these stocks have edged higher in the days leading up to the election, as the polls have become more confident of a Conservative win, and they could climb further come Friday. However, they all dropped on Wednesday as the gap narrowed in the latest polls and the race become more unpredictable.
Since the election was called last month Persimmon has gained more than 11%, along with British Gas owner Centrica /zigman2/quotes/205228367/delayed UK:CNA +0.61% while BP /zigman2/quotes/202286639/delayed UK:BP -0.18% 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 /zigman2/quotes/207954631/delayed UK:WTB -0.34% , broadcaster ITV /zigman2/quotes/205378065/delayed UK:ITV +0.74% 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 British 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 /zigman2/quotes/203761082/delayed UK:TSCO +3.30% and Legal & General /zigman2/quotes/201125471/delayed UK:LGEN +1.05% .
The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.0217% has moved higher over the past week reflecting the market’s confidence in a Johnson win, which could also lead the currency above $1.35 , 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 /zigman2/quotes/204213037/delayed UK:RMG -0.54% BT Group /zigman2/quotes/209006687/delayed UK:BT.A +2.52% energy supply networks National Grid /zigman2/quotes/208805676/delayed UK:NG +0.47% and SSE /zigman2/quotes/204546319/delayed UK:SSE -1.09% and water companies.
A hung parliament, in which no party reaches the 326 MPs needed for a majority, could see stocks fall also as uncertainty remains and the prospect of a no-deal Brexit returns.