Polling points to a change in government after 14 years, but there’s no reason for investors to worry.
Prime Minister Rishi Sunak surprised many political commentators by announcing a UK general election would be held on 4th July. This is partly because opinion polls suggest that the opposition Labour Party, led by Keir Starmer, is currently on course for a comfortable victory (Labour leads the Conservatives by around 20 points on average). However, opinion polls are not always accurate, and sentiment can swing unexpectedly during the twists and turns of an intense election campaign.
Faced with increased political noise and the prospect of a new government, investors will undoubtedly be wondering what the election might mean for their portfolios. For longer-term investors, the short answer is probably “not that much” – evidence suggests that a UK election’s influence on market performance is typically short-lived and less significant than we might expect. Let’s look at three key reasons why we believe investors should remain calm in the run up to polling day.
Markets don’t fear a change of government
Since the inception of the FTSE All-Share in 1962, the benchmark index for UK stocks has recorded double-digit returns in the first year after an election that resulted in a change of government 1. While average returns have been higher when a Conservative government is voted in, the stock market has usually returned to its pre-electoral trend over time, suggesting that the party in power has limited influence over performance in the medium and long term. In fact, data shows that UK stocks tend to perform better in an election year with a predictable outcome 2, regardless of which party wins. This may partly explain why UK stocks and bonds have so far had a muted reaction to the announcement of an election in which Labour is the clear favourite to win.
Limited fiscal space reduces policy uncertainty
While the main parties are yet to reveal their full election manifestos, there is limited divergence on fiscal policies. Both Labour and the Conservatives back fiscal rules to restrict government spending and get debt falling (as a % of GDP) by the end of the next parliamentary term. Both parties have also ruled out income tax and VAT rises, while also pledging to freeze income tax thresholds until 2028 3. Given these commitments and the UK’s tight fiscal conditions 4, the broad direction of fiscal policy is likely to be similar whichever party wins the election. As a result, we believe that interest rate decisions by the politically independent Bank of England (BoE)’s will likely have a bigger bearing on UK stocks and bonds.
Things are looking up for the economy
The UK has generally lagged other developed markets in economic and financial performance in recent years. But there are some signs that the outlook is improving. UK economic growth beat market expectations in the first quarter of 2024, hitting the highest level in nearly three years (output was up 0.6% compared with the quarter before). UK annual inflation also fell sharply to 2.3% in April, increasing the chances that the BoE will cut interest rates late this Summer. While the recovery remains modest and subject to risks, the outlook appears brighter than it has for some time, which implies more favourable conditions for UK companies and investors.
Ultimately, history suggests that the performance of UK stocks and bonds over the next parliamentary term will likely have more to do with underlying economic conditions, company earnings and broader global trends than the party in power after the upcoming election. While investors should stay abreast of political conditions and policy changes in the UK, we believe it’s important to maintain a holistic view and a steady hand when making long-term investment decisions.
If you’re worried about the impact of the upcoming elections, please get in touch with your financial adviser.
Sources
2 https://www.ig.com/uk/trading-strategies/how-do-uk-general-elections-impactthestock-market--190926
3 https://www.bbc.com/news/articles/crggz000lz7o
4 https://www.bbc.com/news/articles/c100n7djyr6o
