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Market Outlook – A Conservative sense of relief

The shock election result, that saw former LibDem leader Paddy Ashdown and former Labour spin doctor Alastair Campbell commit to eating hat and kilt respectively has produced an almost audible sigh of relief across financial markets. The blue chip FTSE100 had all but factored in a coalition as it closed out 0.1% higher at 6,933.74 Wednesday, buoyed by better-than-expected PMI index scores from the eurozone & UK.

But as the threat of Labour driven policies on energy and banking evaporated with Thursday morning’s shock result, the prospect of continued recovery under Tory stewardship brings several sectors into focus as investment opportunities.

Shares in part state-owned Lloyds Banking (LLOY) and RBS (RBS) rocketed on the prospect of the new Tory Govt pressing ahead with plans to sell it’s remaining stake. In particular with Lloyds, where the taxpayer stake has already dipped below 20%, there is also the prospect of a retail offering.

Labour had been aiming to inject more competition into the banking sector – which is already being subjected to a Competition and Markets Authority review – by calling for the creation of new challenger banks and a market share test. There could also have been a bankers’ bonus tax to help pay for its compulsory jobs guarantee.

Shares in energy & water companies such as Centrica (CNA), SSE (SSE) and Severn Trent (SVT) added gains, having underperformed for some time as Labour’s threat to freeze gas and electricity bills until 2017 weighed heavily on sentiment.

And shares in property companies, including housebuilders such as Taylor Wimpey (TW.) and Bovis (BVS) and estate agents Foxtons (FOXT) and Countrywide (CWD) all shot higher, again having been shackled by Labour’s pledge to cap rent increases in the private sector and to introduce a mansion tax on homes worth more than £2m.

Other winners include outsourcing firms such as Capita (CPI) and Serco (SRP) – the Conservatives have long been committed to cutting public spending and outsourcing, plus transport firms such as Go-Ahead Group (GOG) and Stagecoach (SGC) – again recent underperformers as Labour’s threat to return to a system approaching full nationalisation weighed heavily.

Expect further opportunities and enhancements to current tax breaks such as the EIS / SEIS schemes for investment into early stage companies.

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