The starting gun on the next general election has been fired so unexpectedly that the retort has been felt throughout the country. But the first tangible response was a swift rally in the pound, putting pressure on the UK stock market.
“The pound was the big winner from news that a UK general election is in the pipeline, as currency markets bet on the current government winning a greater majority,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.
“The rising pound helped heap pressure on the UK stock market, which was already on the back foot thanks to declining iron ore prices hitting the resources sector. Of course the benchmark FTSE 100 is far from a pure barometer of the perceived health of the UK, given the global nature of the companies that constitute the index.”
Canny investors may be wondering whether they can capitalise on political events. Yet given the recent unexpected election and referendum outcomes, many will be nervous of gambling on the doing so.
And Khalaf believes the election is a distraction that most people should look beyond. He says: “The big risk investors face from an election is that they let it disrupt their financial plans. In the short term market sentiment can be driven by political events, but investors should look beyond any noise as politicians hit the campaign trail, and keep focused on their own long term savings goals.”
Danger and opportunity
Nevertheless, some people are suggesting there could be opportunities ahead. Adrian Lowcock, investment director at Architas, says: “General elections create uncertainty and markets do not like uncertainty. The market has begun to price this in and there is likely to be an ‘uncertainty discount’ on the UK stock market until the election result is known.
“Given that the FTSE 100 is trading close to all-time highs and we are seeing an increase in geo-political uncertainty investors should prepare for increased volatility over the coming weeks and hold a diversified portfolio of equities and bonds as well as property and gold. Having some cash set aside at times of uncertainty will give investors the flexibility to act as more information becomes known.”
Of course, everyone has a political opinion and it may be hard for some investors to prevent that from colouring their predictions and strategy. Kerim Derhalli, CEO and founder of invstr, says: “Politics are one of the most important considerations in making investment decisions. Political decisions affect economic policy and economic outcomes which, in turn, impact financial markets.
“In an increasingly divided world, elections are proving to have a big impact on financial markets…The resulting strengthening of the pound has led to a fall in the UK stock market, just as the fall in the pound last June led to a stock market rally. The key to investing is not to impose one’s own beliefs on the market, but to try to understand how other people will interpret political events.”
Gambling with politics
However, many commentators argue that it is simply too dangerous to plan an investment strategy around the election.
Mike Neumann, head of investment management at boutique wealth manager EQ Investors, says: “Attempting to second guess short term market moves is a dangerous game. Betting on short term moves is more likely to lead to probabilistic outcomes – heads you win, tails you lose – rather than form the basis of a solid investment strategy.
“We’d urge investors to look beyond political events and build portfolios based on their needs rather than focus on the rhetoric of political banter.”
And KPMG’s head of investment strategy, pensions, Simeon Willis agrees that speculating on political events is a risky game. “Not only are you unsure of the political outcome you are betting on, but you cannot be sure of the market’s response even if that outcome materialises. As we saw with Trump – the markets were concerned in advance but proceeded to rally after.”
Some investors will consider it sensible to fly to safer assets given the current national and even international uncertainty. However, any sudden movements can carry risk – even when they seem safe.
Russ Mould, investment director at AJ Bell, argues: “While it may be tempting to head into cash or stock up on supposed haven assets such as gold, the last thing investors should be doing is making any hasty decisions just because Theresa May has called a general election. Short term trading incurs transaction costs and could lock in losses due to short term market reaction to what was a surprise announcement. If there’s one thing markets don’t like, it is surprises…
“Share prices are influenced in the short-term by many factors, including politics, but in the long-term the ultimate drivers of company share prices and valuations are profits and particularly cash flow. So, unless investors think the election result due on 9 June will lead to Government policies that could directly and materially affect a company’s cash flows, then they are probably better off doing as little as possible.”
Diversify, diversify, diversify
Even investors who shy away from adapting their strategy to take advantage of upheaval may take current events as a warning to diversify.
Justin Urquhart Stewart, co-founder of Seven Investment Management, says: “For investors, the course of this election will only underline the need for broad diversification across asset classes and currencies. Good investment is about managing the risks of the unexpected, and here is a great example. The consensus view has been for a weaker Pound, which would benefit the overseas heavy FTSE 100 as we headed towards a harder and harsher Brexit.
“However, just when everyone is facing one way (the consensus way), then it is usually the time to look the other way and manage the risks of exactly the opposite. This scenario could be a higher Pound and a falling FTSE 100 – it seemed so unlikely, but so did the UK referendum and US presidential election results last year.”
KPMG’s Simeon Willis concludes with advice that is relevant no matter what the political or market landscape: “Taking political views can be an interesting part of managing your portfolio but can go badly wrong. A good rule of thumb always is: don’t make bets you can’t afford to lose.”