With the UK election behind us, I’ve been thinking about what that could mean for FTSE 100 stocks.
While I’m sure there will be winners and losers, there are a couple of big names that are worth watching after the Labour Party’s victory.
Defence and aerospace high on the agenda
Foreign policy is high on the list for the new government. The Labour Party is seeking to strengthen ties with the European Union, and focus on international relations with both its European neighbours and the United States.
One area of focus leading into the election was defence and security. Both parties campaigned on increasing defence spending to 2.5% of gross domestic product (GDP) with Labour seeking to do so “as soon as possible“.
That got me thinking about BAE Systems (LSE:BA.). BAE is a multinational defence and aerospace company, as well as being one of the UK’s largest manufacturers.
The BAE share price has had a good year, climbing 15.3% higher to 1,287p.
With a price-to-earnings (P/E) ratio of 20.7, it’s not the cheapest FTSE 100 company going around. However, with big dollars being thrown at the defence sector, BAE could be well positioned to capitalise.
Defence is a sensitive area for obvious reasons. There aren’t that many companies with the size, resources and security clearance to deliver on large government defence contracts.
BAE has over £30bn of total assets on its balance sheet and around £5bn worth of loans. With a strong financial position and favourable industry tailwinds, I think BAE could be a beneficiary of not just the election but the broader geopolitical environment.
All that said, there are still risks. The stock is trading at a fairly lofty valuation, which requires strong earnings growth, and any kind of easing of geopolitical tensions could negative impact demand.
Housing sector rebound
Planning reform to build 1.5 million new homes is at the heart of Labour’s plan to kickstart economic growth. That’s good news for Footsie homebuilders and others within associated industries that could benefit from more new housing builds and increased consumer demand.
One of those I’ve got my eye on is Barratt Developments (LSE:BDEV). The company’s share price has surged 3.5% higher to 509p this morning on the back of the election result.
That’s no surprise given Barratt is one of the UK’s largest residential property developers. However, the company’s 23.1 P/E ratio doesn’t make it the cheapest relative value play in the market.
Also, residential housing can be a very cyclical business given its direct exposure to consumer spending. Higher interest rates can impact on mortgage availability and people’s willingness to spend, particularly if economic conditions worsen.
Wait and see
While I like both companies’ prospects, there are some things that are holding me back from buying.
I want to wait for markets to react and let the dust settle on the election result. The Labour Party victory was widely tipped, and the current P/E ratios of these two FTSE 100 stocks should already reflect much of the market’s expectation of these policies.
That makes me wary of investing today. I think I will wait for each company’s next results release before I pull the trigger on a buy order.
