We’re almost halfway through the year and things are going well for the UK stock market. The FTSE 100 is reaching new all-time highs and general sentiment among market participants appears to be good.
But where’s the market headed for the rest of this year?
The upcoming election
One of the biggest factors that could flip things on their head is the upcoming UK election. Opinions are already heavily polarised on what the outcome will be, so how will markets react?
Research from Citi reveals that the MSCI UK index has historically grown 6% in the six months following a Labour victory. This is in contrast to a 5% decline following Conservative wins. But the pound has also crashed five times during previous Labour governments so it’s difficult to say how the outcome could affect markets.
With very little difference in both parties’ fiscal policies this time around, I can’t imagine there will be much difference. FX analyst Joe Tuckey of Argentex Group agrees, saying: “…we should expect… no reaction to the outcome of the election itself.“
Interest rates
One thing that may have a greater impact than the election is interest rates. At 5.25%, they’re currently at the highest level they’ve been in 15 years. Only three years ago the rate was 0.1%.
Inflation has decreased from 10.1% in March last year to 3.4% this year. It remains slightly higher than the Bank of England’s (BoE) target of 2% but it’s improving and looks likely to keep doing so.
But it’s a careful balancing act.
If the BoE lowers the interest rate too quickly, inflation could increase towards the end of the year. This would likely lead to further volatility in the markets. In its most recent meeting on 9 May, BoE Governor Andrew Bailey said “a change in Bank rate in June is neither ruled out nor a fait accompli”.
Well that’s not very helpful.
A safe investment in uncertain times?
When the future is unclear, I find it’s best to keep my money in defensive stocks. Pharmaceuticals are usually a great option, and AstraZeneca (LSE: AZN) is one of my top picks.
The stock is up 560% in the past 20 years, delivering annualised returns of 9.89% – higher than the FTSE 100 average. Several major brokers including Citi, Stifel, Shore Capital and Jefferies put in Buy ratings for the stock this month.
Using a discounted cash flow model, analysts estimate the shares to be undervalued by 35%. That suggests strong growth potential. But it’s somewhat negated by a high price-to-earnings (P/E) ratio of 38.5, which is above the industry average of 32 and adds risk.
This suggests that investor optimism may be outweighing actual earnings growth.
The company also faces strong competition from rivals like Pfizer and Johnson & Johnson, and its profits rely heavily on patents. With some of its top-earning patents expiring this year, it could lose significant segments of the market to competitors.
Still, earnings and revenue are expected to grow in the coming months, with return on equity (ROE) expected to be 31.4% in the next three years.
Overall, I believe the long-term benefits of AstraZeneca outweigh the risks, making it a good defensive stock.
