|Master Investor Magazine
Never miss an issue of Master Investor Magazine – sign-up now for free!
Robert Stephens, CFA, discusses why the election could be a pivotal moment for these three UK blue-chip stocks.
The 2019 general election could be the most important election in a generation. Not only will its result go a long way to determine whether the UK leaves the EU, it will also have a major impact on the operating environment for UK-focused businesses.
Here are three FTSE 100 stocks that could be among those most affected by the election result. A Conservative majority could catalyse their share prices, while a Labour minority government may lead to an uncertain future.
Labour plans to start nationalising a range of utility stocks within its first 100 days of coming into power. Among those companies expected to be nationalised is electricity and gas transmission business National Grid (LON:NG.).
Although nationalisation may mean that shareholders receive the market price for their holdings, the emergence of a Labour minority government could spark an investor sell-off. This may cause investors to ultimately receive a severely discounted price to the 890p at which the stock trades today.
A Conservative victory could provide a catalyst to National Grid’s shares in the short run. This scenario would avoid nationalisation, and could provide greater clarity on the UK’s political and economic future.
The stock’s 5.5% forward dividend yield suggests there may be a margin of safety included in its current price, but there are other high-yielding stocks that may have lower short-term risk.
Lloyds (LON:LLOY) relies on the UK for the vast majority of its income. In this respect, it differs from other FTSE 100 banks such as HSBC. They have major international operations, and are likely to be less impacted by the election result.
Lloyds has communicated a degree of weakness in business and consumer confidence in its recent updates. This may yet continue under a Boris Johnson-led government. But, his ‘oven-ready’ Brexit deal and a more business-friendly tax policy compared to that of Jeremy Corbyn may provide catalysts to the bank’s financial performance.
The bank has a relatively appealing forward price-earnings ratio of 8.5. It is highly efficient and is investing large sums in long-term digital growth opportunities.
News that Tesco (LON:TSCO) is reviewing its Asia operations could mean that it becomes increasingly UK-focused over the medium term. As has been the case with many retailers, it has experienced challenging trading conditions due in part to consumer confidence being pessimistic for around four years.
A Conservative victory at the general election may provide greater economic certainty. It may convince investors that the UK’s fastest wage growth in 11 years and its lowest level of unemployment in 45 years is worth buying into.
Tesco is enjoying success through improving its product quality, and will use technology to further boost efficiency. Its planned change in CEO in 2020 is a possible risk, but a forward price-earnings ratio of 14 suggests it may be the pick of the major supermarkets.
Labour’s radical economic policies mean that the outcome of the election could have a significant impact on a wide range of companies that operate in the UK. In many cases, the risk of a Labour minority government may be priced into valuations. This could mean there are buying opportunities, although short-term volatility may be high.