Local elections this week have raised the age-old question: does politics matter to markets?
On the one hand, markets hate uncertainty and the results coming in today bring about plenty of that, with Saxo Bank senior UK investor strategist Neil Wilson describing the results so far as looking “very bad for Labour”.
That’s a bit of an understatement. At the time of writing, the Labour party has lost control of eight councils, although we are very early into the count.
You know things aren’t going brilliantly when the prime minister has to come out before all of the election results are known to state that he is “not going to walk away”.
Theo Bertram, director at think tank The Social Market Foundation, said Labour is “running out of time” to fix things.
One potential option mooted by almost everybody is a change in leadership. Jason Hollands, managing director at Evelyn Partners, noted that speculation has been “brewing for months” that the prime minister could face a leadership challenge and the latest election results are hardly going to quieten those opinions.
If Starmer’s seat was hot before this week’s local election, I would imagine it is now scalding. He may not walk away, but his party may oust him before the fire on his seat spreads to the entire government (assuming it hasn’t already).
Political instability has been a real problem for UK stocks, despite what many will tell you. Although some are quick to remind investors that the UK stock market is not the same as the domestic economy and that domestic politics are less crucial to companies that generate most of their earnings from overseas, this doesn’t stand up to scrutiny.
Since the Brexit referendum in 2016, investors have been net sellers of UK equities, citing political instability as one of the main reasons to avoid the market.
While investors who stayed in the UK market have made reasonable absolute returns (the FTSE All Share is up 135.8% over the past decade), they would have been better off investing elsewhere; the MSCI World index is up 260.3%, almost double the UK index during this time.
During this time even the best UK fund – Artemis SmartGARP UK Equity with a 259.2% return – has underperformed the global index.
For anyone still harbouring hope that things will change, it is time to finally admit that you are not investing based on reason, but gambling on the UK outperforming with little to back this up.
There is a chance it happens, so it’s not worth selling out entirely, but there are steps investors can take. The UK makes up just 3.7% of the MSCI World index, but I would wager is a much larger percentage of people’s portfolios.
When you can get better returns from most other markets – at the very least it might be time to consider bringing the allocation down to more in-line with the index.