After back-to-back defeats in the British Parliament Prime Minister Johnson was compelled to invoke a snap election to end this ongoing political and Brexit-related saga. On Tuesday (October 29, 2019), PM Johnson declared a pre-Xmas election to fix political turmoil as well as deliver Brexit-related outcome.
However, the fear of a disorderly or no-deal Brexit has finally receded, given that the opposition made a no-deal withdrawal out of the equation a pre-requisite for backing PM Johnson's proposed snap elections. This would help the U.K.'s riskier asset classes to consolidate as their prices were impacted by the fear of a no-deal Brexit.
Meanwhile, many MPs, Political analysts, former Ministers and many others indicated that the snap election could end with another hung parliament and could prevent Prime Minister Boris Johnson from delivering Brexit.
The members of House of Commons finally agreed to a general election on December 12, 2019 in an attempt to find a way forward. The timing of the snap election and the scenarios built around it makes this election a highly unpredictable one since World War II.
However, snap election is good news for many London Stock Exchange-traded stocks, including Royal Mail Plc (RMG), as it gets paid to deliver election leaflets. However, the group is facing potential threat from CWU, as 97.1% of CWU members voted recently to exercise industrial action or strike. The vote could result in the first national strike for the postal department in a decade.
Also, the Alternative Investment Market-listed YouGov Plc (YOU) could be amongst the beneficiaries as demand for the services of polling firms could increase. However, this segment represents a small portion of the group's overall business.
Housebuilders also will not be impacted much because the election is being held during a period when they won't be selling many homes anyway.
The exact impact of this election is unpredictable, but it could turn out to be in one of two directions. The first is that the PM Johnson secures a majority at the House of Commons, which will allow him to steer his Brexit-related agreement through the British Parliament. This would provide some clarity to the businesses in short-term and could stimulate Pound Sterling and other asset speculative asset classes including real estate, etc.
The other result that can conclude the snap election is a hung parliament which means no one gets a majority in the House of Commons. PM Johnson could think of forming a coalition government, but this will be relatively easier for the opposition leader Jeremy Corbyn if he proposes to conduct another referendum over Brexit and could rely on the European Union to further extend the deadline for withdrawal.
This kind of outcome could bring more uncertainties to the U.K.'s businesses, as the opposition Labour party raised its pitch for the nationalization of the U.K.'s utility providers. This could jolt transport providers and impact infrastructure funds as well.
Utilities and Transport, Banking, and Defence are the most exposed sectors to the pre-Xmas elections.
In case the opposition leader Jeremy Corbyn becomes the next British Prime Minister, it could have a material impact on the U.K.'s Utilities and Transport, Banking and Defence sector businesses, as they exposed to the risk of change in management control over their businesses.
Utilities and Transport
Stocks of companies that supply electricity and water in the country have been an excellent indicator of election risks in the U.K. ever since Labour Party first vowed to nationalize utilities a few years back. Top of this list is water and electricity utilities, covering the likes of United Utilities Group Plc, National Grid Plc, Severn Trent Plc and SSE Plc.
But if the Conservative Party is able to retain power in this election, this threat would evaporate and the underperformance of U.K. utilities with respect to their European peers may be reversed. It could be a similar story for other stocks and sectors the Labour Party is said to have targeted for nationalization, including postal-service provider Royal Mail Plc and the companies that run British transportation services like FirstGroup Plc and Stagecoach Group Plc.
Britain’s banking sector is also significantly exposed to the snap election, given the potential victory of opposition leader Jeremy Corbyn and unfriendly business attitude of their government could lead to the flight of capital out of the U.K.
Corbyn has been a vocal opponent of military intervention in the Middle East and has argued for the suspension of arms sales to Saudi Arabia. His anti-war stance could hurt defence suppliers such as BAE Systems Plc, whose stock could get hammered severely if Labour Party comes to power.
U.K.'s Blue-Chip Index- the FTSE 100
Given that the risk of a no-deal Brexit has been entirely eliminated, this could boost export dominated FTSE 100 and index and business as a whole could move higher. However, this will also boost the British currency which was under pressure ever since the chances of a no-deal Brexit significantly heightened after PM Boris Johnson came to power.
If Conservative Party returns to the power with adequate majority at the House of Commons, the Pound Sterling could consolidate again and continue to rise against the basket of major foreign currencies. If this happens, given the inverse relationship between FTSE 100 and Pound Sterling, the large-cap FTSE 100 index would underperform against peer indices.
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