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What will the UK General Election mean for your investments.

With less than a few days until Britain goes to the polls, David Horowitz, from our Financial Planning team looks at what the UK general election will mean for investment markets and what, if anything, you should do to prepare.

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+44 (0)20 7556 1379
horowitzd@buzzacott.co.uk
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The most important election of a generation

On 12 December, UK voters head to the polls in what has been touted as ‘the most important election of a generation’. While the election outcome and overall impact are unknown, there is no shortage of speculation about how the election will affect investment markets. As such, should you change your investment strategy based on manifestos of parties capable of a win?

The short answer to this is ‘no’. The only thing we can be sure of is that trying to outguess the market is often a losing game. While genuine surprises may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to benefit from trying to identify mispricing of investment markets. Therefore, it is unlikely that your investments will gain an edge by attempting to predict what will happen to investment markets in the wake of a general election. 

Walk down memory lane

Up until recently, the sole focus of this election has been Brexit. However, increasingly there have been predictions about the election outcome and its effect on stock markets and sterling. As one would expect, markets generally perform well during times of greater political stability. However, the prospect of a hung parliament could have more impact in the short term on markets rather than a specific party winning a majority. Many polls predict this outcome but it is worth recalling that the situation was similar in 2015, with a hung parliament and the anticipation of the closest election result in history. In the end, the result was a clear majority for the Conservatives.

Various commentaries have been produced pointing to the potential impact of a win by certain political parties and which outcome might have the best, or perhaps least worst, effect on stock markets. You should consider taking a long-term outlook to any investment. The graph below shows the growth of £1 invested in the UK equity market over more than 60 years and the respective 12 Prime Ministers over this period. (Click here to enlarge.)

DimensionalUKMarketIndex

 

Index description
Dimensional UK Market Index, 2017 May: Compiled by Dimensional Fund Advisors from Bloomberg securities data. Market capitalisation weighted index of all securities in the United Kingdom. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.

There have certainly been variations in volatility under certain premierships, with events such as the 2008 financial crisis punctuating the graph. However, what this graph illustrates is that there is no obvious pattern of long term stock market performance based upon which party has the majority in the Commons at the time. Rather, for those with a long-term investment horizon, it does show that the market has provided substantial returns regardless of the occupant of Number 10. 

In general, if you attempt to make investment decisions based upon the outcome of elections or other short-term events, they are unlikely to result in reliable excess returns. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes. Accordingly, there is a strong case for you to rely on patience and well-considered portfolio structuring, rather than trying to predict short-term outcomes to achieve returns or avoid downturns.

A disciplined approach to investing 

A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets, and markets have rewarded discipline. With this in mind, we advocate holding globally diverse portfolios to ensure political events in one region do not overly effect the pursuit of long-term investment returns.

Rather than attempting to predict the future or outguess others, Buzzacott’s approach is to draw information about expected returns from the market itself, using data and academic evidence.

Next steps

The first step towards building a robust financial plan and investment strategy is a free initial meeting to explore your current position and aspirations.

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