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Yesterday (May 22), the Prime Minister surprisingly announced that the UK would go to the polls in five weeks. Historically, general elections have an impact on the FTSE 100so here is my game plan.
All about expectations
To start, it is important to note that the market reaction does not depend on who wins. What really matters is the degree of uncertainty that will prevail on Election Day.
For example, if polls in the coming weeks show that one party is clearly in the lead, there won't be a big surprise on election day if this turns out to be the case. In theory, the stock market takes into account all current information. Therefore, in this case there should not be a big movement.
However, if the polls show things are very tight, then we could see a more volatile reaction. If this turns out to be a hung parliament (where no party has enough votes), the stock market is likely to initially fall. Again, this is due to the uncertainty of not knowing what will happen.
An area I am focused on
How I construct my list of goals has less to do with the short-term measure on Election Day and more to do with policies that could be implemented in the coming years.
For example, any party will focus on helping the real estate sector. Therefore, I have added Taylor Wimpey (LSE:TW) to my list. Over the past year, the stock is up 16%. However, the FTSE 100 housebuilder has endured a tough couple of years.
Rising interest rates and the cost of living crisis in the UK have weakened demand for construction. People were struggling to get affordable mortgages.
The tide finally seems to be turning. At the last Annual General Meeting held in April, the management commented that in “Continued market stability supported by good mortgage availability and sustained customer confidence.”
It is clear that the party in government will be keen to ensure that this trust is maintained. Help could range from stamp duty cuts for buyers or even subsidies for Taylor Wimpey linked to achieving certain targets. Either way, I think the stock could outperform over this period.
Of course, there is a risk that interest rates (and mortgage prices) will stay high for longer. This relates to the actions of the Bank of England, not the government.
More sectors to consider
There are other areas that I am adding to my list of goals. This includes some pharmaceutical companies that should benefit from greater investment in the NHS. Additionally, I'm thinking about adding some financial services firms that would benefit from advising clients on any tax changes that may result from the election.
Ultimately, I'm getting my things in order now, before the election. As things develop on the campaign front, I'll be able to shorten my list and then look to buy shares shortly before Election Day.
