Industry Insider: Will the election be good news for investors in UK equities?

Published by Darius McDermott on 09 May 2017.
Last updated on 15 May 2017

Stock market graphs

In calling a snap election for 8 June, Mrs May hopes to increase the Conservative working majority in Parliament and give herself more chance of achieving the ‘hard’ Brexit she desires.

The day of the snap election announcement saw a rise in sterling of 2% against the dollar and a fall in the stock market of 2.5%. But what can we expect in the lead up to the election and beyond?

Our research team ran the figures to undertake a quick analysis of the UK’s stock market performance both before and after UK elections since 1983. Possibly disappointingly, we found that no real discernible patterns emerged.

Broadly speaking, UK equities (stocks and shares) neither rise nor fall consistently over these periods. Nor can we identify any specific patterns based on who is the incumbent party or who gets into power.

We also looked at the margin by which parties won in these elections to see if a clear margin resulted in a big uplift in confidence, but, again, nothing exceptional arose.

Investors shouldn’t get complacent

The win for Emmanuel Macron in the French presidential election means uncertainties over big changes in Europe have subsided. Financial markets were soothed by his widely predicted victory in France. If Marine Le Pen had won we could have seen big falls and the future of the Eurozone and euro currency could have been in question.

However, investors shouldn’t get complacent.

Back on home soil, some politicians and public figures are attempting to persuade voters to make tactical voting choices on 8 June, as pro-EU supporters try to ensure a ‘soft’ rather than ‘hard’ Brexit, by diminishing the Conservative majority. Conversely, there is also the chance that opposition to a second Scottish referendum could prompt voters north of the border to switch from the SNP to Conservatives.

While emotions are running high, it remains to be seen if voters will go as far as changing their political allegiance.

A buying opportunity?

Ultimately, a stronger hand in negotiating Brexit should be positive for our stock market. With markets achieving a number of ‘all-time highs’ recently, any correction could represent a buying opportunity for long-term investors.

Three UK equity funds that I like, which have been run by the same manager over at least four elections, are EdenTree Amity UK, one of the UK’s oldest socially responsible funds, Liontrust UK Smaller Companies and Marlborough Special Situations. All have a bias towards the UK’s smallest businesses, which now sit at their widest discount relative to larger companies in 17 years. UK smaller companies are presenting a more attractive entry point for long-term investors than we’ve seen in a while.

UK stock market returns in the six weeks before and six months after general elections
Election date Winner Party Majority (no. of seats) % returns of six weeks before election date % returns six months after election date
09-Jun-83 Thatcher Conservative 144 8.46% 7.45%
11-Jun-87 Thatcher Conservative 102 7.74% -27.51%
09-Apr-92 Major Conservative 21 -4.04% 4.96%
01-May-97 Blair Labour 179 3.48% 10.44%
07-Jun-01 Blair Labour 167 1.45% -8.41%
05-May-05 Blair Labour 66 -0.69% 11.97%
06-May-10 Coalition Conservative/Lib Dem 78 -7.62% 13.16%
07-May-15 Cameron Conservative 16 0.37% -6.63%
Table shows total returns as measured by the MSCI UK index. Source: FE Analytics, April 2017

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott’s views are his own and do not constitute financial advice.

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