With less than a month to go until we head back to the polling booths, it looks like markets don’t know which way to turn. Nevertheless, it’s fairly easy to speculate what the reaction will be if Boris Johnson or Jeremy Corbyn get the keys to Number 10.
A majority win for the Conservatives will likely result in shares rallying since this provides investors with a bit more certainty that Brexit will happen, perhaps as soon as the end of January (although further negotiations will be required after we’ve left).
A win for Johnson wouldn’t necessarily be good news for all stocks though. Those who generate the majority of their earnings overseas — a big chunk of the FTSE 100 — might not be in demand as much of those with a domestic focus as a result of a rebound in sterling.
A Labour win, however unlikely some believe this to be, could mean chaos in the markets for several reasons.
Firstly, Corbyn has said he’ll attempt to agree a new deal with the EU, which will then be put to the people in the form of a second referendum. Whether you agree with this or not, it does mean more delay which, in turn, could put investors off investing in the UK.
Secondly, a Labour government could oversee the re-nationalisation of several industries, including energy, water and rail. Even a part-nationalisation of BT has now been proposed. As such, anyone invested in companies operating in these areas could see the value of their shares hammered.
Even those not holding these stocks could be hit with a new financial transaction tax and a rule stating that employees of firms above a certain size should be given a proportion of their company’s shares.
Of course, it may be that there’s is no clear winner. Such a scenario would be equally concerning for the markets since, again, it simply prolongs uncertainty. Sterling would likely fall, as would the share prices of UK-focused companies.
How to prepare
Clearly, no one knows for sure what will happen. We can, however, prepare. I would use the time between now and 12 December to review how your money is allocated.
Those nearing retirement and fully invested in equities, for example, may want to ask whether they could stomach a (temporary) hit to their wealth or whether they might need exposure to other assets such as bonds, property and gold. If it’s the latter, then a bit of rebalancing will be required. It won’t allow you to escape a market shock entirely, but it should allow you to sleep at night.
With regard to specific companies, I’d continue to avoid (or ensure I wasn’t too exposed to) anything that looks vulnerable to re-nationalisation. Although these stocks will likely soar if Corbyn were beaten, that’s not reason enough to buy them now. Foolish investors should be primarily focused on holding a diversified bunch of great companies for the long term, not making a quick buck. Returns should certainly not be reliant on the outcome of political events.
Lastly, I’d also make sure I’ve got some cash on hand if markets fall. Times of panic are, after all, the best time to go shopping for stock, particularly related to quality businesses that have been trading on hitherto excessive valuations.
