Alexander Grace Chartered Financial Planner

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Polls, pledges and portfolios: the election effect  

Elections have significant implications for the political and economic landscape and can spark speculation and uncertainty within investment markets.  

The UK is set to head to the polls on July 4 after Prime Minister Rishi Sunak took Westminster, and the country, by surprise last month with news of the impending election.  

In the aftermath of some bruising local election results for the Tories, and amidst talk of a possible hung parliament, some pre- and possibly post-election jitters are to be expected.  

So what impact could the election have on the markets? And how could it affect your own portfolio?  

How do elections impact the markets? 

Political parties often make pledges related to future economic policies in the run-up to a general election, which can lead to an adjustment in investment values.  

However, although elections can create uncertainty and volatility around the election date with pledges on issues such as tax cuts and spending priorities, they rarely change the direction of markets.  

This is because markets are more affected by economic variables such as employment, inflation, interest rates and technological change.  

How have markets fared in previous election years?  

Historically, the impact of elections on the markets is hard to discern and often short-lived.  

Research carried out by IG Group into the elections since 1992 found that there was no real pattern when it comes to market impact. They did find that the market slowed down during the uncertainty which ensued after the 2010 election, but quickly rallied once the coalition government was formed.  

This is echoed by an analysis by Schroders which concluded: “clear-cut general election campaigns tend to have a positive effect on the stock market… when elections have been a close affair, markets have retreated”.  

AJ Bell looked at all 16 of the general elections since the FTSE All-Share launched in 1962. The research is a heartening read for those who worry about the impact of a potential change of government, concluding: “On average, the FTSE All-Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another ushered into it. There are also greater average gains when a government changes relative to when it remains the same.” 

It appears that what will ultimately matter for financial markets will not be short-term policies or electoral pledges, but the state of the economy.  

A vote of confidence 

The majority of retail investors – 66% – believe the UK markets will prosper after the next election. Research by Charles Schwab suggested that most investors anticipate a stronger performance after our next trip to the polls, indicating a “growing sense of optimism” for the UK, according to Richard Flynn, managing director at Charles Schwab. He said their research, which was published in April, found that retail investors believe “market values will improve once the uncertainty around the upcoming elections has been resolved”. 

Focus on the fundamentals 

While potential market volatility can be nerve-racking, you can entrust your investments to us. Regardless of how the markets react to the general election this year, your own portfolio is unlikely to be affected.  

We usually recommend investing for at least five years, absorbing any short-term fluctuations and giving your portfolio plenty of time to recover from any bumps in the market. Your portfolio is also likely to cover different geographical regions and asset types, further mitigating any election-related ripples.  

When you invested with Alexander Grace, we discussed your long-term goals and devised a strategy to work towards them. Stay focused on your long-term goals and your reasons for investing.  

Get in touch  

If you have questions about what the election and any related market uncertainty means for your financial plan or you want to reassess your overall investment approach or just want reassurance, please do let us know and we will arrange a call or face-to-face meeting. 


Sources: 

https://www.ig.com/uk/trading-strategies/how-do-uk-general-elections-impactthestock-market–190926
https://www.schroders.com/en/global/individual/insights/how-does-the-ftse-100-perform-before-elections
https://www.ajbell.co.uk/articles/investmentarticles/270619/what-could-next-general-election-mean-uk-equities
https://international.schwab.com/resource/charles-schwab-uk-investment-forces-study-2023

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