Many investors will be awaiting the outcome of next week’s general election result with much trepidation as prime minister Boris Johnson seeks a parliamentary majority to push forward with his Brexit plans.
The Conservative party behind the slogan of ‘get Brexit done’ have led the polls, although the prospect of another minority government has not been completely discounted.
However, the possibility of any clarity over Brexit is seen as positive for the UK economy and markets. Since the election was called, sterling has strengthened while UK equities have also benefited from improved investor sentiment.
“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,” said Shaan Raithatha, economist at Vanguard’s investment strategy group.
However, Raithatha said the election should not get in the way of long-term investment outlooks, which shouldn’t be upended by one event.
“In our view, it is very rare for any particular event to have in equal measure an immediate and a long-term impact,” he said. “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.”
Thinking back to the 2017 general election, Raithatha said heightened volatility which surrounded it was a short-lived disruption.
In fact, he said, “investors were relatively unaffected by the result despite the Conservative party losing its majority”.
The same can be seen both before and after the 2016 EU referendum vote.
FTSE All Share performance 90 days pre and post vote
Source: Vanguard Asset Management
As the chart above shows, the referendum vote was different than the polls expected as was the impact on financial markets.
While the FTSE All Share did fall in the immediate aftermath of the result, the benchmark – like its international peers – has climbed higher during the intervening years.
“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,” said the Vanguard economist.
“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.”
He added: “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.”
Adrian Lowcock, head of personal investing at Willis Owens, agreed that investors should stick by their long-term outlook.
He said: “it is important for investors to focus on long-term trends in the market rather than short-term swings, such as the market reaction to an election.
“In the long-term, investors will focus once again on the most important factors which determine stock market performance, such as company profits and the economic outlooks.”
Lowcock added: “The real message when it comes to the UK is that valuations have lagged other developed markets – such as the US – thanks to uncertainty over both Brexit and the general election.
“As these get resolved, at least in part, in December, it may be that the UK is subsequently able to make up some lost ground on other stock markets.”
Whilst the suggestion to not juggle your portfolio in a reactive way and ignore the short-term events may make sense that doesn’t stop investors worrying about it altogether.
A recent survey of clients by Interactive Investor at the end of November found that more than half had highlighted the outcome of the election as their biggest concern.
Most concerning geopolitical events for investors
Source: Interactive Investor
Lee Wild, head of equity strategy at Interactive Investor, said that UK voters faced a binary choice in what was being run as a proxy for a referendum on EU membership.
As such, the outcome of the election would likely have a big impact on UK equities performance in December.
“Regardless of personal political affiliation, a Boris Johnson majority and the perceived certainty around Brexit that it brings, could potentially trigger a rally in UK-focused equities,” he added.