Bourses Get A Leg Up Rally Amid Boris Johnson’s Win

Boris Johnson secured a vote of confidence from the conservative party members on Tuesday and is all set to succeed Theresa May as next British Prime Minister. He secured a vote of 92,153 of the Tory members, which was twice the votes secured by his peer Jeremy Hunt. Johnson is pro-Brexiteer and was the face of 2016 Brexit referendum.

Now, the chances of UK to go for a Brexit is quite high, as promised by Mr Johnson that if he comes to power, he will deliver Brexit, with or without any deal on the scheduled date of October 31, 2019.

The British Prime Minister Ms May is scheduled to vacate the chair by Wednesday, post visiting Buckingham Palace to see Queen Elizabeth, where newly elected tory leader Mr Jonson would be formally appointed before stepping in the Downing Street.

Post securing majority in the leadership election, Johnson announced that the new administration is going to get UK out of the EU bloc as on October 31 and will utilise the advantage of all the potential opportunities it will provide in new sprit “Can do”.

He also added that the strategy of his leadership campaign had been to exercise Brexit on its scheduled date and unite the country and defeat the opposition, and that is what he is going to pursue.

Equity Indices at the London Stock Exchange ramp up amid Johnson’s victory.

FTSE 100

Price Chart (as on July 23, 2019), before the market close. (Source: Thomson Reuters)

The broader index of 100 large-cap companies by market capitalisation surged 78.97 points or 1.05% during day’s session (before the market close) and quoted at 7,589.82 at the time writing. Except for technologies sector, all other sectors of the FTSE 100 index were trading in the green, with sectors like Telecommunications Services, Basic Materials, and Healthcare were among the top-performing sectors on the FTSE 100 index and up by 1.67%, 1.46% and 1.42% respectively.

On stock-specific standpoint, stocks of Melrose Industries PLC, DS Smith PLC, Smurfit Kappa Group PLC, NMC Health PLC, Johnson Matthey PLC, Barclays PLC, Smiths Group PLC, Standard Chartered PLC, Standard Life Aberdeen PLC and Glencore PLC are among the top gainers, and all trading up by over 2%.

At the current level, the index was trading at an LTM PE multiple of 14.7x and offering a dividend yield of 4.40%. On a YTD basis, the index was up by 12.50%.

FTSE 250

 Price Chart (as on July 23, 2019), before the market close. (Source: Thomson Reuters)

The market-cap weighted index 250 companies consisting of the 101st to 350th large companies which are listed on the main market of the London Stock Exchange, have nudged 117.75 points or 0.60% and quoting at 19,764.27. With sectors like Energy, Industrials, Healthcare and Financials are among the top gaining sectors on the FTSE 250 index; however, technology is the biggest laggard on the index, down by 0.82% respectively.

On the stock-specific front, stocks like Beazley PLC, Energean Oil & Gas PLC, Hays PLC, John Wood Group PLC, Apax Global Alpha Ltd, Cairn Energy PLC, Victrex PLC, CYBG PLC and Weir Group PLC are the top gaining stocks on the index, and all are up above 3% respectively.

At the current trading level, LTM PE (x) of the index stood at 15.8x and offering a dividend yield of 3.25%, and the index is up by 12.93% on a YTD basis.

FTSE 350

 Price Chart (as on July 23, 2019), before the market close. (Source: Thomson Reuters)

FTSE 350 index is the market-cap weighted index and combination of the stocks which are constituent of FTSE 100 and FTSE 250 companies, and it reflects movement in large 350 companies by market cap listed on the London Stock Exchange. The index added approximately 30.47 points or 0.73% in day’s session and quoting at 4,191.22. With the sectors like Telecommunications Services, Healthcare, Industrials and Energy were the top gaining sectors on the FTSE 350 index.

On the stock-specific front, stocks like Melrose Industries PLC, Beazley PLC, Energean Oil & Gas PLC, Apax Global Alpha Ltd, Hays PLC, Smurfit Kappa Group PLC, Aston Martin Lagonda Global Holdings PLC, NMC Health PLC, DS Smith PLC and John Wood Group PLC were the top gaining stocks of the index, all are up over 3.5% respectively.

At the current trading level, the index was up by approximately 12.66% on a YTD basis and offering a dividend yield of 4.22% respectively.

Let’s look at the AIM Segment of the LSE

FTSE AIM 100 Index  

 Price Chart (as on July 23, 2019), before the market close. (Source: Thomson Reuters)

The market-cap weighted index of 100 large business listed on the alternative investment market segment of the London Stock Exchange. The index includes business ranging from a mature business who are seeing for expansion, established companies and VC backed start-ups as well. In the day session, the index surged by 22.61 points or 0.50% (before the market close) against the previous trading level and was quoting at 4,725.58. On a YTD basis, the index was down by 7.69% and trading at an LTM PE of 20.40x.

FTSE AIM All Share

 Price Chart (as on July 23, 2019), before the market close. (Source: Thomson Reuters)

The FTSE AIM All-Share Index comprises all companies which are listed on the Alternative Investment Market of the London Stock Exchange, those who full fill the requirements for free float and liquidity. The index has added approximately 4.21 points or 0.46% against the previous closing level and was quoting at 920.42 (before the market close). The index was up by approximately 6.7% on a YTD basis. And at the current trading level, the index is offering a dividend yield of 2.02% and trading at an LTM PE of 2.02x.

Is this rally sustainable?

A long-standing leadership crisis in the UK has finally come to an end on Tuesday, what we can presume is that today’s rally in the stocks listed on the London Stock Exchange has more to do with the political stability with investors under the impression that the UK would be better off now as Johnson is in the front seat.

However, many FTSE 100 or FTSE 250 companies are now not very much reliant on the UK, as their business is diversified across many other geographies. Now, after the Boris Johnson’s victory, chances of Brexit with or without a deal has been heightened substantially. It is true that if Britain remains in the EU bloc, this would push the FTSE 100 index, but if it goes for Brexit, then sterling pound is going to fall, which will push the FTSE 100 stock up a lot, because of higher revenue realisation on account of currency transition.

But, if Brexit gets negotiated, it could give significant pain to the companies, whose primary geographical areas of operation is limited to the UK or Europe only. They could be falling knifes post-Brexit, and one should be very conscious while catching them out, as just because they have fallen too much and looks to be added to the portfolio, would not add any value to their portfolio.

Therefore, one should need to design a proper strategy while selecting stocks in the present scenarios, because good picks at this point of time could enable them to make handsome amount of money in a short to mid-span of time, on the other side, if the stock selection goes wrong it could drag the portfolio in to a long term recession and recovery is also not very certain. Looking for globally diversified businesses with attractive dividend yield could be a good bet. Because these are global companies, and because of some past macro and political development, they have not rallied too much against their peers who performed in the other major markets. So, if one is buying them at a lower valuation, its not only UK’s stocks at a cheaper valuation, instead, he is buying global stocks at a cheaper valuation.

There could be chances that, Tuesday’s rally in the FTSE broader indices, mainly driven on the expectation that Johnson’s victory could have substantial pain on the pound value against the dollar. And market participants may be speculating on a pound plunge in the near term.

The bottom line is that the volatility is going to be higher in the UK market, on one side investors are speculating a plunge in pound in the wake of a hard or no-deal Brexit that could benefit FTSE 100 companies, and on the other side experts are claiming for a recession like situation creeping into the UK economy in the wake of a no-deal Brexit. Also, the recent economic data release has strengthened the chances of a recession as Manufacturing PMI, Services PMI, and Consumer Confidence are falling. These all economic metrics indicate a challenging future for the UK and Brexit could add fuel to this slowdown.

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