The result of the general election has caught many investors by surprise. As we know, the Conservative Party had enjoyed a large lead in the polls, and Theresa May was expected to improve on her previous majority. However, this didn’t happen with the Tories reliant upon the DUP to form a government.
Looking ahead, such a government could become relatively weak. Difficulty passing legislation often means such arrangements fail to last the full term. With Brexit talks set to commence shortly, the pressure on the government could lead to further political instability and a weak UK economy. Here’s how Foolish investors could potentially benefit from such a situation.
UK shares
A number of companies that rely on the UK for a large proportion of their earnings have seen their share prices come under pressure already, such as retailers and housebuilders.
In the short run, I think this trend could continue. Even if the government survives the full five-year term, uncertainty may remain high and this could cause challenges for the UK economy. Weaker sterling may increase import prices and cause inflation, which may reduce business confidence and put consumer spending under greater pressure.
Therefore, the shares of UK-focused companies could remain downbeat and volatile in the short run. However, I would say that in many cases their valuations are already reflect this, giving investors a decent margin of safety, and potentially making them worth buying for the long term.
Dividend shares
As mentioned, weaker sterling could result from political and economic uncertainty. This could push inflation higher and make dividend stocks even more appealing to investors.
The FTSE 100 continues to offer many shares that yield 4% or more, while the FTSE 250 provides even greater choice in this regard. Such companies could gain in popularity as investors seek to generate a level of income greater than the rate of inflation. This could push their share prices higher.
Also of interest could be companies able to grow dividends faster than the rate of inflation, especially since political uncertainty means an interest rate rise may become less likely, keeping savings rates low.
Defensive stocks
As ever, defensive stocks could offer a degree of stability at a time of uncertainty. Companies that are less dependent on the performance of the wider economy may be worth a closer look. Greater political risk may cause businesses to delay spending and investment plans, while higher inflation could lead to pressure on disposable incomes.
However, I suspect some defensive stocks could struggle. Notably, utility stocks may be less attractive than previously. The possibility of another general election means the threat from nationalisation may remain, which I think could lead to somewhat lacklustre performance over the medium term when compared to other defensive industries such as healthcare and tobacco.
International focus
Of course, investors wishing to avoid the political and economic risks faced by the UK may wish to invest in international stocks.
Given the international flavour of the FTSE 100, this idea shouldn’t be particularly difficult to put into action. For example, consumer goods companies may be more dependent upon the performance of emerging economies than the political outlook for the UK. Similarly, mining and oil stocks may see their share prices affected by commodity prices rather than the make-up of the UK government.
Companies with international exposure could also offer currency gains as well as lower risk. The pound has already fallen since the election, and more falls could follow. This could lead to positive currency effects for companies which report in sterling, but operate mostly in non-UK markets.
Looking ahead
Investors face a potentially challenging period which may be full of uncertainty. But you could argue that’s nothing new! Certainly, the election result was a surprise, but for Foolish investors it could now present an opportunity to benefit in the long run.
