Last night’s election result won’t please everyone. But the markets are taking a very bullish view of the prospect of five more years of (hopefully) business-friendly policies.
Reduced uncertainty over Brexit is seen as another positive, although it’s worth remembering that the UK still needs to negotiate a trade deal with the EU (and every other country in the world).
Let’s take a look at three of the big winners in the FTSE 100 — each of which represents a sector that’s struggled in recent months.
Banking gains
When markets opened this morning, shares in Lloyds Banking Group (LSE: LLOY) rose by as much as 10%. At the time of writing, the Lloyds share price has settled down and is up by around 5%. Other banks are showing similar — or bigger — gains.
Why is this? Banks are now unlikely to face the introduction of state-backed lending banks, restrictions on branch closures and other measures proposed by Labour. I suspect that the new government will also accelerate the sell-off of the Treasury’s remaining stakes in Lloyds and RBS, returning them to full private ownership.
I tipped Lloyds as a buy at 57p in November. Would I still buy? Recent gains have pushed the stock’s dividend yield down to about 5.2%. That’s at the lower end of what I’d want from a low-growth, mature business, but I think the payout should be fairly safe. I’d hold the shares and look for an opportunity to buy at around 60p.
No privatisation
Poor performance hasn’t been the only factor holding back utility shares. The risk that they might be privatised under a Labour government was also a concern. That’s no longer a risk, and the SSE (LSE: SSE) share price is up by almost 10% as I write, trading close to its 52-week high of 1,444p.
I’ve been tempted by SSE as an income buy this year. I’ve held off because I own shares in another utility, but I remain of the view that SSE could be an attractive long-term pick. The group’s growing focus on renewable energy and the sale of its energy supply division should create a more sustainable and manageable business, in my opinion.
A dividend cut this year is expected to reduce the payout to 80p per share. After this morning’s gains, that gives a dividend yield of about 5.5%. As with Lloyds, that’s at the lower end of what I’d look for, but with a return to growth expected next year, I’d still consider this stock as a potential buy.
Housing investors rejoice
Some of this morning’s biggest gains were seen in housebuilding stocks. Shares in Persimmon are up by 11% as I write, at nearly 2,800p.
Labour planned to set tougher standards for affordable housing and give Councils responsibility for building social housing. This could have forced housebuilders to accept much lower profit margins.
By contrast, Conservative plans for a new shared ownership scheme seems likely to provide a timely replacement for the boost provided by Help to Buy, which is due to be phased out from 2021 onwards.
Persimmon is taking an aggressive approach to dividends and is expected to pay out nearly 90% of earnings to shareholders this year. Even after today’s gains, that gives PSN stock a stonking 8.4% yield. If you think the housing market will remain stable and healthy, these shares could be worth considering.