General Election 2019: Stocks to play the election result

These are the contrarian value shares already starting to re-rate in expectation of a Tory win.

With just days to go before the UK General Election, all eyes are on the stock market for clues to which way prices might move once the result is known. 

After three-and-a-half years of uncertainty since the EU referendum, the biggest questions surround Brexit, and whether the result will make things clearer. There’s a view that Brexit turmoil has put the brakes on big decisions by corporates and consumers alike. So, will the Conservatives win a majority and “get Brexit done”? Will Labour defy the polls and introduce a new agenda for Brexit and business? Or will a coalition government emerge and bring with it all manner of uncertainty?

A Boris boom or Corbyn crash?

There are also wider questions about how the market will react to some of the policies on offer. In many ways, the Tory manifesto promises more of the same, together with pledges on infrastructure spending, house building and progress on a new free trade agreement with the EU. That’s likely to soothe investors, but the outcome of Brexit looks likely to remain a big uncertainty. 

Labour’s manifesto offers some rather more dramatic changes - some of which contain at least a kernel of common sense. But it’s likely that pledges on nationalisation, higher corporation tax and windfall taxes on oil and gas companies won’t go down well with investors. Labour’s pledge to renegotiate the Brexit withdrawal bill and hold a new referendum on it, might increase the chances of no-Brexit, but it would also prolong the uncertainty.

Right now, there’s evidence that the outcome of the election itself is the most pressing issue in the minds of investors. A survey by interactive investor found that its customers were more concerned about who will win the election rather than what will happen with Brexit (44% versus 32%). A third of their customers said they were not investing in anything until the outcome of the vote is known.

• General Election poll: Over half fear vote results

Meanwhile, 43% of respondents said they were increasing their cash holdings but an equally large proportion (45%) said they were sticking with their investment strategy whatever the political weather. 

Indices sensing a Tory win?

In terms of trends in the main share indices, there are signs that the market is sensing a result. Interpreting short-term gyrations is tricky, but the FTSE 250 index has clearly broken free from the large-cap FTSE 100 in recent weeks (+5.1% versus -1.8% over three months). There has also been a pick-up in the smaller-cap AIM All Share through November. 

FTSE 100 and FTSE 250 indices, year to date

Source: Stockopedia

Why would small- and mid-caps be bouncing? Despite deriving 35% of its revenues from abroad, the FTSE 250 (like AIM) is a much more domestic-oriented group of companies compared to the blue-chip 100 index. So, gains on these indices are perhaps a whisper that the market is sensing a Tory win and the clarity that would (presumably) bring to Brexit and British companies. 

Ways to trade the election outcome

Bearing all of this in mind, which stock market strategies are worth watching in the aftermath of the election? One approach is to look at what’s going on among the cheapest, high quality stocks in the mid-caps. With the FTSE 250 trending higher, are contrarian shares starting to re-rate on a potential Tory win?

This screen looks for just that. It takes the highest blend of company quality and appealing share valuation using Stockopedia’s QV rank (stocks must have a QV rank in the top 20% of the market). It also looks for a solid 10%-plus relative price strength over the past three months - so it’s focusing on contrarian value shares that are on the move.

The results are interesting because they pick up stocks in economically sensitive sectors like cyclicals and industrials. Housebuilders like Bellway (LSE:BWY), Redrow (LSE:RDW), Bovis (LSE:BVS) and Galliford Try (LSE:GFRD) all appear to be on the move. Likewise, recruitment stocks, which can be a bit of an economic bellwether, often lead the market on an improving outlook - and here we have Hays (LSE:HAS) and PageGroup (LSE:PAGE) passing these rules.

Even the online trading platform IG (LSE:IGG) makes it onto the screen. IG shares have been hit badly by profit warnings in recent years, but its price has been trending upwards in the past couple of months, perhaps anticipating higher levels of forex and share trading.

Overall, individual investors, fund managers and brokers all desire clarity. While the UK’s two main political parties offer very different manifestos, the main issue in this election is Brexit and how it might start to be resolved, one way or another. Whether or not we’re in for a short-term Boris boom or Corbyn crash, the longer-term issue of Brexit - and the need for a much clearer outlook for UK-listed stocks - is crucial for investors.

As Blake Crawford, a fund manager at JPMorgan, said in a recent note:

“Whichever way the result goes... I’m just hoping for a clearer path forwards and something that resembles a modicum of clarity and with any luck investment fundamentals will once again come to the fore as we head into 2020.”

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

• Interactive Investor readers can enjoy a two-week free trial and £50 discount to Stockopedia using the coupon code iii014 - click here.

These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.