As I write these words, the FTSE 100 index is up almost 5% from its pre-election close, having gained over 330 points in just two days’ trading.
Some individual shares have done much, much better, of course – essentially, those that had been adversely exposed to an incoming Labour government’s nationalisation and regulatory agenda.
Utilities, banks, builders, infrastructure companies – many of these saw double-digit share price increases on the morning after the election, and have climbed since.
It’s not difficult to see why. For ordinary investors like you and I, Labour’s policies on wealth were an obvious cause for concern, and re-nationalising whole swathes of the economy made little sense. Neither did grabbing 10% stakes in many other businesses.
And whatever your take on Brexit, Boris Johnson’s commanding majority means that he can, if he wishes, take his time and secure a reasonable trade deal with the European Union.
Throw in the Conservatives’ own policies with regards to infrastructure investment and trade deals with countries outside Europe, and it’s no surprise that a sunnier mood is prevailing. Investors in FTSE 250 companies have especial grounds for optimism, given the FTSE 250’s strong UK earnings focus.
Timing is everything
For some, it’s come too late.
Spare a thought for Mark Barnett, for example, axed as investment manager of the Edinburgh Investment Trust, just days before the election.
His crime? Like his mentor Neil Woodford, he invested in those same FTSE 250 businesses, seeing them as undervalued.
In Internet discussion forums, too, I’ve seen investors ruing that they didn’t stock up on utilities and nationalisation targets in the days and weeks before the election, when their share prices were on the floor.
It’s still not too late, is my view, but there’s no denying that the best bargains have sailed.
As ever, the best time to buy – as better investors than me have always said – is when pessimism is at its highest. Warren Buffett was right: you do pay a high price for a cheery consensus. And right now, a cheery consensus is undeniably driving share prices upwards.
It’s not just the stock market that is feeling sunny, either. Sterling is sharply up, too. Back in October, when I took a short holiday in Portugal, a pound would buy me about €1.09, at a pinch. Today, it’s €1.19, with the dollar rate seeing broadly comparable gains.
Here, investors need to be cautious. The plunging pound has driven the share prices of many FTSE 100 companies sharply higher since the referendum of 2016.
The reason? Rich overseas earnings, which become more valuable in a depressed UK currency. In contrast to soaring share prices elsewhere, global giants like GlaxoSmithKline and Royal Dutch Shell have merely inched upwards.
Amid the euphoria, investors – especially income investors, like me – need to remember that a rising pound means that dollar- and euro-denominated dividends will be worth less in sterling terms.
Meaning that there will also be some downwards pressure on the share prices of such companies, too.
Work in progress
So how should investors play the weeks and months ahead?
A lot obviously depends on Brexit, of course. We may be leaving the European Union, but we still need a good trade deal going forward. Tariffs and trade friction could do a lot of damage, and I for one will be looking hard at what negotiators – on both sides – manage to achieve in the next few months.
It’s worth remembering, too, that it’s been over ten years since the economy was last in recession. A recession will come; the only question is when. Put another way, a ten-year bull market is now getting decidedly long in the tooth.
Don’t forget, either, that Trump’s tariffs and trade wars haven’t gone away. The UK is arguably less exposed to Trump’s ire than some of our major trading partners, but when the economy of one of your major trading partners feels pain, so do you.
And finally, it’s important to see how the Conservatives’ manifesto promises get translated into action. Or even if they get translated into action.
On the assumption that they do, then expect to hear a lot more from me on the subject of infrastructure companies, which is where quite a few of my own investments have been made, over the last couple of years.
All in all, the Conservatives’ election victory is a remarkable outcome.
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Malcolm owns shares in Edinburgh Investment Trust, GlaxoSmithKline, and Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline.