Why the UK election shouldn't distract investors from their long-term plan
28 November 2019 | Markets and Economy
By Shaan Raithatha, economist, Investment Strategy Group
For many people, there is a sense that the general election on 12 December will mark a decisive change in the direction of UK policy, and most likely the economy.
Recent experience has shown that opinion polls can be substantially wrong. At this time it is difficult to tell whether the election will bring a significant majority to one of the main parties, or a parliament balanced between larger and smaller parties.
In any of these outcomes, it is less than clear how much of what was promised in the campaign will translate into actual policy and law.
In our view, it is very rare for any particular event to have in equal measure an immediate and a long-term impact. Financial markets are complex entities, with hundreds of thousands of participants and a number of major stakeholders, including central banks and pension funds. It is more likely to take time, usually months and more likely years, before the effects of any but the most momentous events play out.
The chart below shows the performance of the FTSE All Share Index before and after the UK’s referendum on leaving the European Union (EU) in 2016, and the 2017 UK general election. It also shows the S&P500 before and after Donald Trump’s election in 2016. In each of these votes, the outcome was different to what had generally been predicted.
But just as the results of the votes went against predictions, so did the response in financial markets. As is clear from the chart, whatever heightened volatility occurred around the time of these events, the disruption proved short-lived. In the case of the 2017 general election, investors were relatively unaffected by the result despite the Conservative party losing its majority.
The lesson here is that basing investment decisions on a single event requires not only predicting the outcome of the event, but further predicting how markets will react. Following the UK referendum on leaving the EU, the fall in sterling was seen to benefit the overseas earnings of larger UK companies and was therefore a positive for UK equities.
Rather than moving a portfolio around specific events, we believe in ‘staying the course’. If an investor’s goals don’t change, neither should the investments.
Index performance 90 days pre/post event
Source: Vanguard calculations based on data from FactSet.
Notes: Index is rebased to 100 on date of event. Events analysed are the UK Brexit vote on 23rd June 2016, the US presidential election on 9th November 2016 and the UK general election on 8th June 2017.
Investment risk information:
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Past performance is not a reliable indicator of future results.
Other important information:
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