Tomorrow the nation goes to the polls in perhaps the most unpredictable General Election since the end of the Second World War. With the leading parties looking unlikely to achieve an all-out victory, there has been much jockeying for some form of coalition-combo that will take time to sort-out and may not bode well for the market. There have been countless articles with compelling headlines and frightful narratives about the fate of such a close result. However investors shouldn’t be worried about the election outcome because it really matters little in the long game of managing your wealth.
Compared to our continental cousins, we seem to have an abhorrence of coalition; yet one could argue that the muddle-through nature of the past five years wasn’t so bad after all. From an investing perspective, the returns were up 9% per year annualised1. Would we have done better if it wasn’t so cramped in Downing Street?
Some analysts believe that an outright Conservative or Labour majority could actually be bad for the market and the pound. The prospect of a ‘Brexit’ – leaving the EU after a referendum, which has been promised by the Tory government – could send the FTSE downwards. Meanwhile a Labour win may be considered anti-business and fiscally irresponsible, causing both domestic and overseas investors to falter. Perhaps surprisingly, markets tend to favour weak governments because they are less likely to achieve radical policy change. Arguably the most favourable outcome for investors, at least in the short term, is a minority-led government where austerity measures or a referendum are put on the backburner.
Small Fish in a Big Pond
Most of us favour one party over another, but historically our loyalties aren’t particularly helpful when it comes to evaluating the potential outcome on the markets. According to data compiled by Hargreaves Lansdown, the Conservatives have delivered twice the returns over Labour for UK investors since 1970. However, you can’t ignore the facts behind these numbers. In 1974 the world was mired in a global recession and in 2007 the financial crisis struck. It’s important to point out that the UK stock market is only a small part of a truly global trading community. What happens abroad has a big impact on the results we see here and is not under the control of our politicians.
Even if you consider UK shares only, the majority of most large company’s earnings are generated elsewhere. Over 70% of the FTSE 100’s profits can be attributed to foreign trade.
Sensible investors have a well-diversified portfolio and are likely to have just a small proportion of their assets in the UK. For instance, the UK’s share of Vanguard’s Total Stock Market Index fund ETF is only 7.45%. It may sound simplistic, but diversification is certainly the best chance you have of a positive long term financial return. Whilst it doesn’t make for colourful headlines, you really can rest assured that spreading exposure to risk will deliver results in line with the market. A few may get lucky, but quick wins are not sustainable and in today’s climate of unpredictability a passive approach to managing your wealth is the best bet.
There is unlikely to be a dull moment in the coming months. However the election is a short term event and the best option is to ride out the volatility. The UK markets may be in for a bumpy ride but investments based on the fundamentals of markets will be borne out. It is the very nature of our democracy that makes the market efficient. We have all the necessary data about any given stock publicly available. This asserts that prices reflect values and information quickly and accurately and that it is difficult, if not impossible, to capture returns in excess of the market without taking greater-than-market levels of risk.
Swings and Roundabouts
Predicting future currency is notoriously difficult and many factors outside UK policy have an influence. The pound has been very strong against the euro at â‚¬1.40 in the past month due to the single currency quantitative easing and anxiety over Greece defaulting. While Sterling has recently fallen to a five-year low against the US Dollar, this has not been attributed to our elections but deflation and the likelihood that an interest rate rise will be delayed behind the US. Arguably it is the Bank of England rather than the election which will hold sway on our economic outlook in the coming months. We have a long way to get back to 2% inflation.
However, if the pound falls further this would boost foreign earnings which would increase the appeal of owing UK shares that profit overseas because exports become cheaper and more attractive. So, it is swings and roundabouts.
Maintain a Long-Term Perspective
The General Election clearly matters, but maybe not so much for investors as you might think. The economy is such that even a change in government will not affect investors in the long term. It is wise to ignore the drama surrounding the elections as they have only a fleeting effect on financial markets.
The outcome on Thursday may be uncertain but whatever happens it won’t change the long term outlook overnight, although it may be challenging. “Diversify risk” and “the long-term” will be our investment mantra for many years to come.
Contact Quadrant Group today to find out how we could help you invest your wealth and plan for the future, regardless of the outcome of the General Election. Or read more about how we could enable you to Enjoy A Life Well Lived.
1 FTSE All-Share Index
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.