The main competing parties - the Labour and Conservative - have both promised to help smaller companies. While the former said it would back an investment bank easing access to financing and supporting a network of regional lenders, the latter pledged to lower taxes on jobs and enterprise if they get elected for another term. Polls signal both rivals are neck-and-neck, and neither will end up with a majority in Parliament.
According to data compiled since the 1987 UK vote, the FTSE 250 Index rallied almost 18 percent on average in the 12 months following a general election - more than twice as much as its yearly returns and double the advance of the FTSE 100 Index, which follows the biggest stocks in the market.
As Bloomberg reports, the mid-cap gauge tracking companies such as Provident Financial Plc
and betting firm William Hill Plc has usually beaten the FTSE 100, but
its outperformance is particularly great in years following a general
election.
Peter Garnry, Saxo Bank A/S’s head of equity strategy, considers, this happened because policies started by new governments benefit companies which have their revenue mostly from the United Kingdom.
“Post an election, there are more benefits thrown around for domestic-oriented companies than the international ones dominating FTSE 100,” Garnry said. “If you’re betting on the U.K. economy, go for the FTSE 250.”
Provident Financial, one of the biggest components of the FTSE 250, gets all of its revenue from the U.K. and Ireland, while William Hill generates 82 percent in Britain. That comes in contrast with companies in the FTSE 100, whose two largest stocks - HSBC Holdings Plc and BP Plc - receive at least two-thirds of their sales from abroad.
From 1987 to 2014, the FTSE 250 rose 8 percent annually, compared with 5 percent for the FTSE 100. Only in the year following the 1997 election did the gauge of smaller shares underperform bigger stocks. That was when the Labour Party took power after 18 years of Conservative-led governments.
In 2015, the gauge tracking smaller companies rose 8.5 percent,
beating the 5.5 percent gain in the FTSE 100. That took the FTSE 250’s
valuation to 17 times estimated profit of its members, or almost 5
percent higher than the multiple for the FTSE 100. At the same time, that’s near
the lowest FTSE 250 valuation since 2010 relative to the index of bigger
stocks, Bloomberg says.
A number of analysts see a danger to the pound.
Christian Gattiker, the head of research of Julius Baer Group Ltd. in Zurich sees the pound as one of the biggest threats. The currency has strengthened more than 5 percent versus the euro this year.
Guy Foster, the head of research at Brewin Dolphin in London, predicts the U.K. stock rally will run further, and smaller shares stand to gain more. He also says they’ll benefit more than FTSE 100 companies from the nation’s improving economy and potential reforms that the winning party will put in place.
“On the assumption that you have a kind of feel-good period after an election, the FTSE 250 should be well placed to benefit from that,” he said. “It is easier for some investors to get caught up in the euphoria of a new bold agenda.”
