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3 reasons why I think the FTSE 250 could rally following the general election result

Well, there we have it. After a long campaign trail, TV debates, and a countless number of “get Brexit done” soundbites from PM Johnson, we got the election result last Friday.

The exact results once all had been counted showed a Conservative majority of 78, with 364 seats compared to Labour with 203. Financial markets were pricing in a Conservative victory, however, the scale of it exceeded expectations. As a result, a jump higher was seen in UK assets across the board.

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Due to it being traded 24 hours a day, the first market to react was foreign exchange, where the British pound jumped around 2% on the exit poll late Thursday night. I discussed the timings and likely reactions in my article on the day of the election here.

When the stock market opened for trading at 8am on Friday, the FTSE 250 jumped higher and this move managed to hang on to finish the day up 3.4%. From here, I think we could see even further gains in the FTSE 250.

Domestic focus

I favour the FTSE 250 to perform better than the FTSE 100, as it contains a lot more firms that are focused on operations solely here in the UK. This means the firms will be better able to take advantage of the manifesto pledges made by the Conservatives.

Looking back over the past few years of a Conservative government, corporation tax has reduced from 28% to 19%, along with record low unemployment and an up-skill in the workforce due to public sector investment.

Now while I stay neutral on politics, from an investment point of view, if we saw these types of things continue, it would certainly provide a boost for FTSE 250 domestic firms. 

Reduced FX exposure

As a large part of the FTSE 250 trades just in the UK, firms within it will be less hampered by the rising value of the pound. This has already been evident from trading on Friday, when the FTSE 250 rose over 3% versus the FTSE 100, which was up just over 1%.

This difference can be explained by the fact that the pound rose 2% as well. FTSE 100 exporters in effect saw their costs rise by 2%, because when they bring back profits from overseas earnings, it is worth less due to the stronger pound.

Brexit boost

Following the election result, PM Johnson has already mentioned that he wants to bring his Brexit bill to a Parliamentary vote before the end of the year. Due to the large majority he now commands, it should make it a lot easier to pass this bill and, dare I say it, “get Brexit done.” Brexit uncertainty has hampered domestic firms more than international ones, as domestic firms within the FTSE 250 are completely tied to whatever trade arrangements are made as part of the withdrawal. 

Thus, if Brexit can indeed be achieved early next year, this could pave the way for domestic firms to outperform their peers in the FTSE 100 due to increased clarity in trading terms.

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Jonathan Smith and 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.