Domestically-focused UK stocks have rallied today – despite the FTSE 100 index falling 3% since yesterday, erasing 2017 gains. The losses came following the UK Prime Minister Theresa May securing a majority vote in the House of Commons to call a General Election on June 8.
The FTSE 250, which is made up of smaller and more domestic-focused UK companies, gained 0.7% today; with retailers and homebuilders posting share price gains.
After touching new record highs several times in the past three months, the FTSE 100 is currently down 0.6% year to date. A stronger sterling, following the announcement of a General Election in June, is the main driver of the market fall. International companies, which source their revenues in dollars, make up a significant part of the blue-chip index, meaning currency fluctuations play a large part in FTSE 100 returns.
A stronger sterling means profits earned by these international companies will be less compared to a weak sterling in the past six months, said Colin Morton, lead manager of the Silver Rated Franklin UK Equity Income fund.
However, a stronger sterling is positive for domestic stocks, helping domestic companies who import goods into the UK and reduce some inflationary pressures, both of which have hurt the margins of some domestic focused companies, said Chris Beauchamp, chief market analyst with IG Group the online trading platform.
Franklin’s Morton agreed, saying many UK retailers buy a lot of their products from overseas and sell it in the UK.
An upgrade to the UK’s growth forecast by the International Monetary Fund yesterday also pushed up shares of domestic stocks today, Morton added.
“The UK economy continues to do well. The UK economy is actually one of the best performing economy in the world at the moment in terms of growth, despite all worries of Brexit, so I think people are thinking if we have a stronger pound, and more stability after a snap General Election, a combination of all those things will help domestically-oriented stocks to do better,” said Morton.
The International Monetary Fund yesterday announced an upgrade to the UK economic growth forecast for 2017 to 2%, from an earlier prediction in January for 1.5% annual growth. The IMF also upgraded its UK forecast for next year, from 1.4% to 1.5%. The IMF ranked the UK as the world’s second fastest growing major advanced economy for 2017, behind the US.
Retailers and Homebuilders Stocks Rise
Shares of domestically-focused stocks in the FTSE 100 are up today. Supermarket stock Sainsbury (SBRY) was up 5.3%, while Marks & Spencer (MKS) gained 2% and Morrison Supermarkets (MRW) rose 2.9%. Fashion retailer Next (NXT) also enjoyed gains of 3.1%.
EasyJet (EZJ) also gained 5.3% today. The airline company announced a profit warning following the Brexit vote back in June, but has since rallied.
Residential developers Taylor Wimpey (TW.), Persimmon (PSN) also gained 2.7% and 2.6% respectively, while Barratt Developments (BDEV) gained 2%.
“The rally in the housing related companies is likely attributable to a real chance to address the housing shortage in the country which again the Chancellor and the Government will find easier to do with a strong majority to get any legislation voted through,” said IG’s Beauchamp.
Will a Snap Election Lead to Stability?
While domestically-focused stocks are doing well thanks to a stronger pound, the market seems to be buying into the idea that a snap election in June will leave us with a stronger and a more stable government, said Laith Khalaf, senior analyst from Hargreaves Lansdown the trading platform.
Morton argued that if May gets a bigger majority of seats in Parliament after the snap election, that certainty would make her Brexit negotiations with the European Union much easier.
“The election brings with it the possibility to increase the Conservative majority in the House of Commons quite substantially. This would leave May, firstly with a legitimately elected position as prime minister, which would allow her to pursue policies with a firmer mandate, and with a longer period of time to have those policies play out.
“This puts together a greater sense of stability for UK policy making and a stronger, more united government,” said Shaniel Ramjee, senior investment manager of Pictet multi-asset portfolio.
The June election will not delay Brexit negotiations with the European Union as the discussions would not have begun until early July anyway said Jordan Hiscott, chief trader at ayondo markets.
“The dual effect of clearer certainty on how Brexit is likely to take place and the increasingly likely prospect of leaving the single market are both possible reasons for the FTSE 250 being higher today,” Hiscott added.
