How will the stock market react to the general election outcome?

With a new government entering parliament today, how will the stock market react? Here this Fool delves deeper into the issue.

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Yesterday the UK population took to the polls to vote for our next government. As it had been predicted, the Labour Party won with a resounding majority. But putting politics aside, some may be more concerned about how the stock market will react to the news.

An early bounce

As I write, the FTSE 100 is up around 0.3%. That comes on the back of a 0.9% bounce yesterday. The pound also had a strong day, gaining 0.2% against the dollar.

It could be said that a rise in the Footsie was expected. There have been nine general elections since its inception. Following eight of those, the index has increased the day after the vote. The only exception was in 2010 when the Conservatives didn’t get an overall majority. What this shows is that the market likes stability/certainty. And Labour’s landslide win gives that.

Looking beyond that

I’m sure in the coming weeks there will be an abundance of noise about the potential implications a Labour government will have for the market. But I’m looking beyond that.

I’m on the hunt for long-term value. Regardless of which party is running the country, I’m confident that UK shares look severely undervalued at the moment.

For example, NatWest (LSE: NWG) is piquing my interest. It’s been on my watchlist for a while and I plan to take a closer look at the stock.

First, it will be interesting to see what Labour plans to do with the shares it will be inheriting. The government still owns a 20.9% stake in the bank from when it bailed it out in 2008. Former Chancellor Jeremy Hunt had announced plans to offload its remaining stake via a retail sale. Understandably, these plans were put on hold after the election was announced.

There’s talk that the remaining shares will be sold at a discount to the market price. While that means it could be tempting to wait until then, I think NatWest shares look like great value right now.

The stock trades on just 7.3 times earnings and 7.6 times forward earnings. While all UK banks look like good value at the moment, that’s still dirt cheap. Its price-to-book ratio is just 0.7, where 1 is fair value.

Passive income

Then there’s the passive income angle. The stock has a meaty dividend yield of 5.2%, covered comfortably by earnings. Its payout grew by 26% last year to 17p. Alongside that, earlier this year the bank announced a fresh £300m share buyback programme.

Better to hold off?

They say good things come to those who wait. So, it could be smarter for me to hold off and see what plans Labour has for NatWest. I could invest today only for the government to announce it will sell its shares for a lot cheaper than I paid. That’s a risk. There are other risks to consider too, such as ongoing interest rate uncertainty.

Missing out on gains

But I like the look of NatWest shares today. I could wait until a government sale. But what about the potential gains and passive income I could miss out on? At least, that’s my thought process.

The stock has soared 48.2% this year. It clearly has momentum on its side. I’m strongly considering opening a position in the British stalwart.

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.

Charlie Keough 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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