Elections | Wells Gibson

UK General Elections and the Stock Market

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Over the long run, the stock market has provided substantial returns regardless of who lives at Number 10.

Last week’s snap election was the first national vote in the UK since the EU referendum. Although we now know the outcome of the election, the overall impact is unknown. Furthermore, there is no shortage of speculation about how the election will impact the stock market. Below, we explain why investors would be well-served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions. Trying to outguess the market is often a loser’s game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants – including expectations about the outcome and impact of elections. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So, it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after last week’s or any future general election.

The focus of last week’s election is Britain’s exit from the EU. However, as is often the case, predictions about its effect on the stock market focus on which party will be “better for the market” over the long run. Exhibit 1 below shows the growth of £1 invested in the UK market over more than 60 years and 12 prime ministers (from Anthony Eden to Theresa May).

Exhibit 1: Growth of a Pound Invested in the Dimensional UK Market Index

January 1956–December 2016.

Growth of a Pound Invested in the Dimensional UK Market Index graph

For illustrative purposes only. Past performance is not a guarantee of future results. Index is not available for direct investment therefore the performance does not reflect the expenses associated with the management of an actual fund. Dimensional indices use CRSP and Compustat data. See “Index Descriptions” below for descriptions of index data.

The above exhibit does not suggest an obvious pattern of long-term stock market performance based upon which party has the majority in the Commons. What it shows is that over the long-term, the market has provided substantial returns regardless of who lives at Number 10.

Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes and the erosion of wealth.

Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in pursuit of investment returns – we call it ‘Sensible Investing’.

Jonathan Gibson
Managing Director


Dimensional UK Market Index: Compiled by Dimensional from Bloomberg securities data. Market capitalisation-weighted index of all securities in the United Kingdom. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.

Investments involve risks. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, might be worth less than their original cost.

The views and opinions expressed in this article are those of the author. Past performance is not a guarantee of future results. There is no guarantee, strategies will be successful. The information in this article is provided for background information only. It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision.

So, it is a hung Parliament…

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As dawn breaks, the morning light reveals yet another political gamble that has not paid off for the dice roller. The UK has a hung Parliament, with no party holding an absolute majority. Such is the unpredictability of a parliamentary democracy. If you ask the people of the UK what they think, be prepared for the answers that you might receive!

The last few weeks has highlighted the divide in opinion in the country of the role and size of the state in our lives, with further austerity and a shrinking state on the one hand, and a material rise in spending (and taxation for some) on the other. Each of us has our own feel for what we believe to be best for ourselves and the country, which we expressed at the ballot box yesterday. We also remain, as a nation, somewhat divided on the Brexit issue, although perhaps mostly united in the reality that it is going to go ahead, in one form or another, respecting the will of the (slim) majority.

More importantly, the last few weeks has united us as a nation in grief and utter condemnation of the barbarous terrorist attacks in Manchester and London, and a deep sense of resolve that the values that we collectively hold as a nation are immutable: decency, respect, tolerance and democracy. Last night we saw what this truly means; Members of Parliament losing their seats, magnanimously shaking hands with their victors and accepting the right of the people to have their say. The election is another stark reminder to those who assault our values that they will never win.

Certainly, it is an awkward time for such political turmoil, with the start of the Brexit negotiations just days away. We will leave the ramifications of this result and the speculation of what we might expect next to others. We don’t want to add to the noise or a further sense of election analysis fatigue.

Strong and stable portfolios (if not government)

What we do want to do is to reassure clients of Wells Gibson that your portfolio is well positioned to weather any storms both now and in the future. It is worth remembering the following:

o Your portfolio is highly diversified through the thousands of equities / shares and bonds that it holds and the countries that it is invested in;

o Your non-UK equities are unhedged, which means that you hold this portion of your portfolio in non-GBP currencies. In the event of a fall in the value of Sterling (GBP), as we have initially seen, these overseas assets will be worth more in Sterling terms;

o Your bond holdings – which are hedged – are diversified across global markets, reducing the impact of any rise in the cost of borrowing that might occur on account of the greater uncertainty that the UK faces at this time;

o While markets don’t like uncertainty, the UK is a small player in the global pond and this morning’s result is just a ripple; and
o Portfolios go up and down; they always have and they always will. If you don’t need to spend the money today, don’t worry about what happens in the coming days, weeks and months.

Although this morning’s result may feel uncomfortable for some, let’s keep it in proportion. We live in a tolerant, open society and judging by the greater level of engagement in the election by the younger generation, a great democracy that cares passionately about its future.

It’s the weekend so put the kettle on, enjoy cup of tea (or coffee) and celebrate this next – if unpredicted and a little uncertain – step for our nation.

If you would like to speak with us about this or any other matter, please feel free to give us a call today.