UK stocks haven’t tanked in the wake of Boris Johnson’s resignation. In fact, the FTSE 100 and sterling both performed well on Thursday. The benchmark index, which isn’t a bellwether for the UK economy, actually jumped after the announcement.
But Johnson’s decision adds a further level of complexity to Britain’s current woes. There’s inflation, a cost-of-living crisis, a war on the continent, and now a leadership void to be filled. It’s a time when markets require certainty.
So what does it mean for markets? And what am I doing about it?
Uncertainty
A host of Conservative politicians have thrown their hats in the ring to be the next leader. However, it’s possible that a successor won’t be announced until the party conference in October and, right now, there’s no real frontrunner.
This creates uncertainty about the things investors need to know about, including taxation, government spending, and regulatory changes.
With Johnson staying on as caretaker leader, the UK could find that policy-making slows down amid what could be a pretty significant economic downturn.
Although, on the topic of uncertainty, there has been a lot of that for quite a few years and the stock market has continued to provide plenty of buying opportunities.
One thing is for sure, whoever is next in line will have a lot to deal with. One of the biggest issues for investors is inflation. A laser-tight focus here will be required.
The Bank of England has already taken steps to control inflation, mirroring moves made by the Fed on the other side of the pond. However, the UK economy is much more fragile than the US’s right now. A tight British labour market is exacerbating issues.
Sticking to my strategy
My portfolio is heavily weighted to UK value stocks, and I won’t be changing my strategy. British stocks have been depressed for some time, owing to Brexit uncertainty, among other things. UK stocks just aren’t seen as an attractive place for investment.
However, many of them are performing well and trade with low price-to-earnings (P/E) ratios. Banks such as Lloyds and Barclays are good examples of this. Both have P/E ratios below six, which looks exceptionally cheap.
It’s also worth noting that the majority of FTSE 100 revenues come from outside the UK. So the current weakness of the pound might actually benefit firms like Diageo and Antofagasta.
Depressed share prices and positive performance have also contributed to some big dividend yields. Housebuilder Persimmon‘s yield is currently 13%. Its share price has continued falling this year but the housing market, so far, has stayed strong.
With valuations down, I’m also looking at UK growth stocks including firms like Kropz. The innovative mining company is down 20% this month.
