Markets hate uncertainty, so they say. And few things are more unsettling than general elections. But they also represent a chance to make money, especially for the experienced trader, comfortable with more sophisticated products that involve spread betting or contracts for difference (CFDs).
Spreads and CFDs allow investors to find opportunities in both rising and falling markets and aren’t confined to one asset class — you can choose to trade on indices, forex, shares, commodities and more.
Here we offer a few trading ideas once the result of Thursday’s vote is clear.
If you want to trade on the night itself, then assume we’ll get exit polls at 10pm, then some key swing seats between 12am and 2am, and then a result from 3am. IG offers 24-hour dealing on a range of instruments, including FTSE 100, the GBP/USD and EUR/GBP, though not for FTSE 250 or individual UK stocks — those markets will open at 8am and close at 4.30pm on election day.
Trying to figure out what will occur the week after the election gets trickier. Memories of the bad predictions before Brexit and Trump in 2016 linger.
So perhaps the trick is not to be sure of what you think will happen, but to work out what everyone else thinks will happen — after all, you’re betting on the price, not the politics of the thing.
Don’t forget, with spread bets and CFDs you do run the risk of extremely heavy losses if the markets go against you. Financial bookies offer what are known as a stop loss function, where clients can set the floor below which the bet stops. Use them.
IG publishes guides for regular clients, some of which we have used here.
Sterling has already come up. Will it go further?
As Brexit woes grew and the UK economy wobbled, sterling got pounded. Lately it has recovered smartly, back up to around $1.31 as investors took the view that Blighty will probably be ok in the end.
For that reason it is hard to get too optimistic about the outlook for sterling, unless the result is a replay of 1992, with the Tories romping home to a big majority.
The pound has popped higher every time a poll has come in showing the Tory lead increasing. It is now at close to a 12-month high against the euro and a seven-month high against the dollar.
A lot of the bounce that might be expected off the back of a Tory win has been priced in already, which means upside could be limited.
A hung Parliament, with attendant worries about delays and a possible second referendum, could set sterling on a downward path again. Caxton senior analyst Michael Brown says: “As we saw in 2017, polls can sharply narrow as we near polling day. If a repeat pans out, seeing Labour gain ground and hung Parliament territory approach, sterling will likely face stiff headwinds.”
Simon French at Panmure Gordon says: “Over the past 50 years the pound has, on average, rallied into elections and sold off afterwards as the enthusiasm for the result fades and the reality dawns.
“However, the sell-off is far more modest following Conservative victories, whilst Labour victories trigger a more significant pullback.”
French still thinks the pound is undervalued against its long-term average. He adds: “So any result that provides a pathway to progress on Brexit and domestic issues is likely to be well received by currency traders.”
IG price: GBP/USD 1.3134/1.3135 and EUR/GBP at 0.84465/0.84474
Three key sectors to watch
Housebuilders: a Labour win would make investors fear compulsory purchase of land to build homes, or a big lift in council-house building that might depress house prices. A Tory win will leave these stocks mostly unaffected. The sector could see some notable inflows if the political environment stays relatively benign.
IG price: Barratt Developments 664.1/666.3
Pharmaceuticals: whoever wins, this sector will be a key focus as Brexit discussions enter a second stage. GSK and AstraZeneca want the UK to keep close links for drug supply and research, which will play a big part in how the stocks trade from January.
IG price: AstraZeneca 7233.00/7246.00
Utilities: If Corbyn were to win they would suffer heavily, given Labour’s nationalisation plans. Conversely, a solid Conservative majority could see the likes of United Utilities and National Grid rally. Royal Mail, while not a utility, would be another name that might benefit after a Tory win.
IG price: Royal Mail 214.09/214.92
Banks in the balance as hard Brexit fears persist
Banks’ shares are depressed. Buffeted by fierce competition and very low interest rates that keep margins tight, investors in British lenders have had it tough.
The feeling in the City is that those stocks would do best if the government pivoted towards a soft Brexit. The current Conservative plan however is of the “hard Brexit” variety, which will raise fears of a bigger economic hit plus a tougher environment inside Europe as UK banks attempt to compete while the EU fights to boost its oversight of a key UK sector.
Ian Gordon at Investec suggests One Savings Bank is worth a good look. He says: “It’s not that I regard it as a key election play… but others do which makes it so. The election will take away the fear of Jeremy Corbyn destroying the housing market in general and buy-to-let in particular. It is (by far) the most undervalued UK bank and it will (sooner or later) sharply upwardly correct. The election could provide that catalyst.”
Shares in Lloyds and Royal Bank of Scotland look undervalued, but they have done for a long time. Since both are a bet on the UK economy, how you feel about that should influence your decision.
IG price: Lloyds 60.30/60.45
BT could be a good call for better returns
In public, BT was open-minded about Labour’s plans to nationalise Openreach and provide free ultra-fast wi-fi for all. Privately, it might have thought the plans a little nutty. While the prospect exists, there is downward pressure on BT shares.
Russ Mould at AJ Bell says: “In the event of a Conservative win, it will be interesting to see if investors take a fresh look at BT, as it would not be facing the prospect of Openreach being nationalised. It still faces huge regulatory and competitive pressures but contrarians may be tempted to argue it is unloved and cheap.”
Away from the big boys, Telecom Plus might be worth a look. Mould adds: “Visibility and quality of earnings could be highly prized should we get another hung parliament and that could point investors toward multi-utility Telecom Plus, which continues to turn new customer wins into earnings and dividend growth.”
IG price: BT 188.99/189.51
Markets look for Tory lift
Markets tend to prefer a Conservative government over a Labour one. They just do.
The Stock Market Almanac studied what happened in the year after nine general elections between 1945 and 2010. It showed that the market rose in eight out of the nine years the Conservatives came out on top and delivered an average annual return of 10.8%. However, the market only rose in three years when Labour won, and the average annual return was -5.8%.
The impact of elections is probably short-lived. Over the much longer run, they will almost certainly go up.
FTSE 100: while the premier index for the UK is relatively insulated from domestic political developments, the strength in the pound has arguably held back the index to a degree, as the US and Europe both see their indices power higher. It could be argued that a weaker GBP could let the index play catch-up to a degree.
FTSE 250: here the domestic outlook plays a bigger part. For the year-to-date, the mid-cap index has comfortably outperformed its bigger cousin, suggesting perhaps that investors in the FTSE 100 are more concerned about the international outlook, especially trade wars. The 250 has also outpaced the 100 on one-year and five-year timeframes.
IG price: The FTSE 100 is currently quoted with a sell price of 7186 and buy price of 7187 and the FTSE 250 at 20771/20813
- This article was sponsored by IG. IG is a world-leading online trading and investments provider, giving you access to opportunities across thousands of financial markets through its intuitive platforms and apps.