The results are out and it’s confirmed that the Labour party will now take over from the Conservatives in Government in the UK. There was a large swing in the public vote yesterday (4 July), with a landslide victory being the outcome. Given that investors don’t like uncertainty or volatility, could this spark a stock market crash in the coming few months?
Unlikely in the short term
In my view, the risk of a crash is slim. It’s true that investors don’t like uncertainty for the future. Yet as far as the results from the election go, it was pretty much as people expected. The polls leading up to the election indicated that there would be a change of government, so this shouldn’t have come as a surprise to anyone.
Further, the chances of a crash are unlikely as the Labour party has positioned itself as business-friendly. There won’t be any imminent corporate tax rises, with the party actually pushing for greater cooperation between businesses and politicians.
Of course, we’ll have to wait and see how this plays out going forward. But certainly as a reaction to the results, I don’t see this triggering a sharp drop.
The risk to my view is if the large majority now in Parliament being used to potentially push through policies that investors perceive are damaging for the economy. In this case, we could see share prices start to fall.
Movements so far
The initial reaction from UK assets has been modestly positive. The British pound has rallied slightly against peers, while the FTSE 100 and FTSE 250 are both higher this morning than where the market closed yesterday.
In terms of specific shares that are most sensitive, I’m keeping an eye on FTSE 250 companies that are very UK-focused. These will obviously be most impacted short term by the change of government.
One I’m watching
For example, I’m keeping an eye on Alpha Group International (LSE:ALPH). The company is a foreign exchange and payments business, with the stock up 6% over the past year. It has offices abroad, but conducts the bulk of business from London.
If the UK economy grows and is helped by the new government, I think Alpha should do well. The UK businesses it provides payment services to should be transacting more frequently if they see demand growing. This will benefit Alpha from higher commissions and payment revenue.
The business is growing rapidly, with profit before tax in 2023 jumping over 140% to £115m versus the prior year. Of course, it’s easier to post large gains when the firm isn’t that huge, but it still impresses me.
The risk is that if we see the pound fall in value, it could hurt revenue as many UK importers will find that the foreign exchange rate becomes more expensive. As such they may even have to source locally and not need the services of Alpha.
But there are so many ‘ifs’ here that it’s hard to call for now. Ultimately, I don’t see an imminent market crash due to the general election results. However, time will tell based on the policies implemented.
