UK election scenarios: Which stocks benefit? – Deutsche Bank

Polls ahead of the UK general election on June 8th have tightened sharply, as attention has shifted from Brexit to unpopular Conservative policies on social care and education as well as questions about Prime Minister May’s leadership according to economists at Deutsche Bank.

Key Quotes

“While a 50+ seat Conservative majority remains our economists’ central scenario (up from the current majority of 17), the probability of a smaller Conservative win or even a Labour-led government have risen. We explore three possible election scenarios – and highlight our sector analysts’ views on the stocks and industries that are likely to be the most affected in each scenario. 

• Scenario 1: A 50+-seat Conservative majority: In this scenario, which is our economists’ base case, we expect the influence of hard-Brexit Tory backbenchers to be diluted, resulting in less conflictual negotiations around Britain’s EU exit. This should allow the GBP to strengthen in the near term and boost risk assets more generally, due to a reduction in political uncertainty (a trend that is already in place, following the benign outcome of the French presidential election). The FTSE 100 would likely underperform the wider European equity market in the near-term due to GBP strength, while domestic UK stocks would likely do well. Our analysts highlight domestically-focused retailers (e.g. M&S, Tesco, Next) as key winners, while UK exporters are likely to be key laggards in this scenario.
• Scenario 2: Conservative majority of below 50 seats or a Conservative minority government: This is the key risk scenario. Our economists think this scenario would increase the influence of hard-Brexit MPs, resulting in increased Brexit crash risk and rising macro uncertainty. Our macro analysts expect the GBP to sell off sharply and Gilt yields to fall to 0.9% in this scenario (from the current 1.05%). Exporters with little domestic exposure but high GBP-sensitivity are likely to outperform (miners, health care, energy), while domestic consumer plays (food and nonfood retail) are likely to be hit by the increase in political uncertainty.
• Scenario 3: A Labour-led government: In this tail-risk scenario – which could involve a Labour-led coalition, a Labour minority government or an outright Labour majority – our economists expect GBP-weakness in the near term, even though they think the GBP could strengthen in the medium-term (on reduced Brexit risks and the scope for easier fiscal policy, leading to a more hawkish Bank of England and higher bond yields). Domestic stocks might be hit in the near-term by concerns about some of the market-unfriendly parts of the Labour policy platform (higher corporation tax, nationalisation and a financial transaction tax). Sectors whose business model relies on low labor costs should also be negatively affected by expectations for a push on higher minimum pay. Banks, retailers and home builders are likely to be among the underperformers in this scenario.”