On the 4th of July, voters across the United Kingdom will head to the polls. Following widespread dissatisfaction with the ruling Conservative & Unionist party, pundits are near unanimous in their expectation that the Labour party will win an historic victory. Despite this result appearing cast in stone already, the prospect of elections in any country brings with it an inherent unpredictability, particularly for investors. Changes in political leadership – by definition – bring new policies, strategies and approaches. Our investment team have pulled together their views on the likely outcome and how they’re managing short-term anticipation in the markets with long-term investment opportunities.
Key takeaways:
- Pundits expect the Labour party to win decisively, given the current dissatisfaction with the Conservative party.
- Despite the potential for political upheaval, historical data shows that markets typically remain resilient to election results, with minimal long-term impact on market trends.
- Square Mile’s strategy does not attempt to predict election outcomes but focuses on maintaining diversified, high-quality portfolios to ensure stable, long-term returns.
The UK election
Scandals like Partygate under Boris Johnson, policy errors causing market disruptions under Liz Truss, and general malaise under Rishi Sunak have led voters to seek new leadership. As a result, polls have long predicted a significant advantage for Labour. It was therefore a shock to many – outside of Westminster gambling circles, that is – that a general election was called early by the incumbent Prime Minister. However, the bold move to potentially catch the opposition off-guard seems to have backfired spectacularly.
Markets have not responded significantly since the election was called, nor to developments during the campaign, likely because many investors consider the result a foregone conclusion. The lack of response may also indicate that markets are not concerned about the outcome, particularly as Labour now presents itself as more moderate compared to its stance in the last election under Jeremy Corbyn’s tenure. This shift, combined with a necessary but yet-to-be-determined investment strategy, is likely reassuring for investors who above all else value stability and moderation in government.
Moreover, historically, markets tend to shrug off election results. Looking back over arbitrarily long time periods, whilst wobbles are observable in and around election day, the general trend is almost totally unaffected by electoral developments.
The US election
The US election, scheduled for early November of this year, is not quite so predictable, and is a far cry from the comparative moderation of British politics. The rancour surrounding the presidency of Donald Trump has reignited as the former President has pulled a small lead on his rival, the incumbent Joe Biden, in opinion polls. This is despite Mr Trump having suffered a significant blow in being convicted on more than thirty criminal charges for using campaign donations to fund hush payments. The indignity of this is not lost on the American voting public, however, given the bombastic and fiery nature of the man was well-known to them already, this development has not ended up as the knock-out blow his opponents would have hoped for. In short, there are very few people left in the US or around the world that could still be surprised by the actions or words of Donald Trump.
The Democratic party of Joe Biden has had a torrid time of late. Perhaps unfairly blamed for issues pertaining to inflation, interest rates and geopolitical crises, they have also been stung by a series of gaffes relating to the aging President’s cognition as well as allegations of corruption relating to his son and to insider trading.
It is for these reasons that Mr Trump appears to be holding a sustained lead over Mr Biden, despite the staggering possibility that the former may conduct at least part of his campaign whilst incarcerated.
However, the same point around the negligible impact of elections in the UK is true of the US. US elections have coincidentally fallen in tough periods for markets, for example 2001 and 2008, however, the general trend has been all but unaffected. Indeed, following Donald Trump’s shock victory in 2016, markets dropped sharply and almost as sharply, rebounded.
The impact of elections
Governments have the capacity to shape policies that can materially alter business decisions, impacting how corporations and organisations function. Investors may, therefore, try to anticipate election results, to get ahead of the curve. But is that the best approach, given how long it typically takes for policy changes to be implemented?
At Square Mile, we don’t try to predict election results and we are not positioning our portfolios to anticipate the UK or US election outcomes – or anywhere else. Our long-term view, factoring in capital markets assumptions and the macro-environment, leads us to keeping our portfolios fully invested with good diversification and a strong bias towards quality businesses throughout our underlying funds. We believe this will deliver the best risk-adjusted returns for clients over the long-term.
