It’s polling day! How will the FTSE 100 respond to the result?

Today (4 July) voters will be asked to choose the UK’s next government. Our writer considers how the FTSE 100 might react once the result is known.

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When the FTSE 100 starts trading at 8am on 5 July, investors will know who the country has elected as prime minister.

If the polls are to be believed, it will be either Rishi Sunak or Sir Keir Starmer. The latter is the firm favourite, but predictions have been wrong before.

A history lesson

Prior to today, there have been nine general elections during the Footsie’s existence. And as the table below shows, following eight of these the index increased the day after polling.

Date of electionPrime MinisterChange in the FTSE 100 on the day after the election (%)
11 June 1987Margaret Thatcher+1.8
9 April 1992John Major+5.6
1 May 1997Tony Blair+0.2
7 June 2001Tony Blair+0.1
5 May 2005Tony Blair+0.3
6 May 2010David Cameron-2.6
7 May 2015David Cameron+2.3
8 June 2017Theresa May+1.0
12 December 2019Boris Johnson+1.1
Source: author’s calculations

The only exception to this was in 2010, when David Cameron failed to secure an overall majority. He then entered into a series of negotiations with the Liberal Democrats with a view to forming a coalition.

This supports the idea that investors don’t like uncertainty.

Indeed, when Boris Johnson was elected in 2019 — a campaign that was dominated by the promise to “Get Brexit Done” — there appeared to be a collective sigh of relief in the City.

I think it’s fair to say that the majority of investors didn’t welcome the idea of the UK leaving the European Union. But despite this, the prospect of removing the uncertainty surrounding Britain’s future trading relationship with Europe was positively received — the index increased 1.1% on the day after the election.

Volatility

Economic theory implies that greater levels of uncertainty leads to investors demanding bigger discounts. This causes individual stock prices — and the wider market — to become more volatile.

Shareholders in NatWest Group (LSE:NWG) have seen more ups and downs than most. According to TradingView, the bank’s stock is the third most volatile in the FTSE 100. And politics has a part to play.

As a legacy of the 2008 financial crisis, the government still holds a 20.9% stake. In the final budget before the election, the Conservative chancellor of the exchequer, Jeremy Hunt, announced plans to dispose of the shareholding by way of a retail offer to the public. According to The Guardian, a TV advert was subsequently filmed promoting the sale.

However, the election led to the plans being shelved. And during the campaign, Labour refused to commit to the sale. It said it would “review the details” if it was elected.

With such a large number of shares to dispose of there’s a possibility they will be offered at a discount to the current market price. After all, if members of the public want to buy the bank’s stock they could easily do so now.

Personally, I’d have to do a lot more research before coming to a firm conclusion. But at first glance, now could be a good time to think about investing.

If the analysts are right, income, the net interest margin and earnings per share should all increase between now and 2026.

And although dividends are never guaranteed, the shares are presently yielding 5.3%.

However, I’m conscious that the bank’s profits could be affected by increased bad loans as a result of a wider economic downturn.

A prediction

Unless there’s a hung parliament, history suggests that the FTSE 100 will see modest gains tomorrow.

As for the NatWest share price, I have no idea!

However, it doesn’t really matter how either will react. That’s because, in my opinion, successful investing is all about taking a long-term view.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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