On 22nd May, the Prime Minister called for an election to take place on 4th July. Away from the political significance, investors may also be considering how this will affect their portfolio. In all likelihood, the impact should be limited, but we provide further comments below.
Equity markets’ “typical” performance in the lead-up to an election
The medium-term run up to a general election tends to be relatively positive for equity markets. In the past 50 years, the FTSE All Share has returned an average return of 19.8% in the year preceding an election. This could be a result of looser fiscal policy boosting stock markets, as governments try to gain favour with the electorate. There should be an element of caution in reading too much into this though. In the UK, where governments decide when to call an election, they are more likely to do so when there is a positive economic backdrop. In other words, strong markets could cause the election, not the other way round.
In the weeks approaching an election, markets may be more sensitive to the polling data, depending on how tight they are. There is a misconception that the markets prefer Conservative governments and react poorly to Labour wins. In reality, what markets crave is certainty. A strong government majority, whatever the colour, is preferable to a hung parliament or minority government. It’s also worth remembering that markets price based on expectations. If the polls predict a landslide victory and they are correct, then market reaction should be muted on election results day, as seen in 1997 with the Labour victory.
What does this mean for the upcoming election?
The commanding lead in the polls that Labour currently enjoys means that markets have already mostly priced in a Labour government. This explains why there was little market reaction to the election announcement. If this follows through to election day, then we expect minimal market reaction to the results too.
As always with politics though, anything can happen. Any result leading to a hung parliament could cause a pickup in market volatility, whether that is a slow improvement of Conservative polling over the next few weeks or a sudden shock result. As explained above, this is not necessarily because investors favour Labour, but because certainty over the outcome is preferred. Even if this were to transpire, we would anticipate the overall impact at a portfolio level to be relatively small.
Over the long term, global economic trends have a much larger impact on markets than elections. There may be short-term volatility where elections are tight, but Labour’s comfortable lead means this is unlikely to be the case. Instead, investors are likely to remain more focused on inflation and the prospect of central bank interest rate cuts.
Source: Hyman Robertson
