Investors often assume that election campaigns are bad news for stocks. But an analysis of how the UK market has performed in the past six elections suggests this may be a myth, according to Chris Dillow in the FT. “On average, volatility during electoral campaigns is lower than it is normally.”
Average returns were worse, but mostly because the FTSE 100 dropped 9% in the 2010 campaign. Other campaigns were unremarkable. That said, in most of these campaigns the “result was a foregone conclusion”. The current election will be more uncertain.
Quite, says Neil Woodford, the UK’s best-known fund manager, in The Daily Telegraph. “I’ve navigated my way through numerous elections as an investor… many of them, quite frankly, unimportant for stockmarkets and equity asset prices”, but “I think now we’re in a slightly different place”.
He anticipates a lot of instability and uncertainty even after polls close. “These are interesting times, but uncertain times, and you have to be wary as an investor in this market.”
So far, there’s little sign that most other investors feel the same way. The FTSE 100 remains near all-time highs, while UK government bond (gilt) yields are lower than they were at the start of the year. That seems “too complacent” given the risks, says investment management firm BlackRock. “A soothing outcome for markets is hard to imagine.”
A Tory victory could pave the way for a British exit from the EU, damaging Britain’s trade links and financial services industry. A Labour triumph could see the implementation of policies perceived to be hostile to business. What’s more, whoever wins, the resulting government is likely to be weak and struggle to pass the legislation needed to achieve its aims, making the outcome even less predictable.
That may be an exaggeration, says Dillow. “Neither main party can pursue grossly anti-business policies because to do so would cause companies to move overseas.” So while the outlook may be tricky for UK equities, it shouldn’t be so bad “that the FTSE 100 wouldn’t rise if global equities generally do well”.
Investors’ phlegmatic attitude may be well-founded. But note that demand for new gilts issues has been weak while foreign holdings are dropping, says Swaha Pattanaik on breakingviews.com. It seems “those who have a choice” are giving the UK a miss until the result is clear.