The FTSE 250 index rose as much as 1.5% on Thursday as the pound advanced.
“If there is a plan to scrap the planned increase in corporation tax next April then UK domestic stocks may respond favorably,” said Alberto Tocchio, a portfolio manager at Kairos Partners. The levy on companies is set to be lifted to 25% from 19% next year.
Britain’s midcap benchmark has slumped 20% in 2022, underperforming the Stoxx Europe 600 as Brexit intensifies the country’s cost-of-living crisis and a falling pound puts further pressure on companies. Uncertainty in Westminster has also weighed.
The FTSE 100, meanwhile, has benefited from its 75% exposure to overseas revenue, leaving it relatively immune to domestic worries. The benchmark’s makeup of energy, value and defensive stocks means it has fallen less than 3% this year.
“The risk is clearly in the midcaps and smallcaps,” said Tineke Frikkee, head of U.K. equity research at Waverton Investment Management. Political uncertainty is already impacting decision-making for companies dependent on government policy, such as homebuilders, she said.
There are specific sectors that could be affected by any change in fiscal policy, too. Tax cuts are inflationary, and could give the Bank of England further cause for concern. Rising rates boost profits for lenders like Lloyds Banking Group Plc and NatWest Group Plc, but may crimp consumer spending, impacting retailers like Next Plc and Marks & Spencer Group Plc.
Investors in utilities like Centrica Plc and oil and gas firms such as Shell Plc will also be watching closely following recent pressure to increases taxes on the sector to help with household energy bills.
Finally, the leadership change may impact defense companies like BAE Systems Plc, given that candidates’ plans for military spending will likely be diverse. Analysts at Citigroup said earlier this year that Johnson’s exit would benefit the sector.