Join our community of smart investors

Investors divided on election action for portfolios

Some fund managers urge investors to defend their portfolios in the face of political uncertainty. Others say politics and market timing don't mix
April 29, 2015

Investors should consider the impact on their portfolios of the prospect of prolonged political uncertainty after the general election on 7 May.

With Labour and the Conservatives neck and neck, it seems increasingly unlikely either party will secure a clear majority, meaning smaller parties could wield significant influence.

Reflecting the political uncertainty, analysts are split on whether investors need to manage their assets in the turbulent electoral climate or whether this instability is already priced into the market.

Mike Deverell, investment manager at Equilibrium Asset Management, says: "May's election looks to be the most uncertain in recent history. Markets hate ambiguity, so some volatility looks likely.

"Given the possibility of a referendum on Britain's continued membership of the EU, we can expect to see more pronounced instability in the shares of companies which trade in Europe. The impact of this uncertainty would dwarf that created by the Scottish referendum."

Investors should 'election proof' their investments, he advises, by holding tactical cash of about 8 per cent to take advantage of volatility and protect portfolio values if markets drop."If the anticipated market volatility does not arise then the set aside tactical cash can be invested elsewhere. However, it could be better to be cautious for now and be prepared," he says.

Viktor Nossek, director of research at WisdomTree Europe, believes the downbeat sentiment in risk assets seen in the two weeks before and after the 2010 election may repeat itself this year, with more vigorous risk-off positioning by investors. He advises hedging UK equity exposure, suggesting buying short exchange traded products that track the FTSE 100 and FTSE 250 indices to protect against falling UK equity markets. However, this strategy will only be suitable for sophisticated investors who have a high appetite for risk.

By contrast, Margaret Lawson, manager of the SVM UK Growth Fund, believes that post-electoral uncertainty has already been priced into the market and warns against investors acting out of fear.

"The research points to investors typically making poor decisions when they try to incorporate politics into market timing. Fear can distract investors from fundamentals; in time, uncertainties are resolved. Many successful economies operate with minority or coalition governments, just as the UK has done in the past," she says.

Growth in Europe's four largest economies and recovering consumer confidence in Germany means the outlook for UK exporters is promising, she believes. She says low deposit rates and no immediate sign of a rise in UK interest rates makes UK equities an attractive asset class in terms of dividend yield.

However, research by Halifax Share Dealing shows recent elections caused little change in the stock market. Despite 58 per cent of investors believing the FTSE 100 will fall because of the election, it found share prices have been unchanged, on average, ahead of the past 11 general elections.

 

UK equity performance: three months before and after a general election

Election dateElection resultPrime minister electedFTSE All-Share change in three months up to electionFTSE All-Share change in three months after election
18 June 1970Conservative majority of 30Heath-16%10%
28 Feb 1974Hung Parliament - (Labour minority)Wilson-10%-19%
10 Oct 1974Labour majority of 3Wilson-26%-15%
3 May 1979Conservative majority of 43Thatcher24%-14%
9 June 1983Conservative majority of 144Thatcher7%1%
11 June 1987Conservative majority of 100Thatcher13%3%
9 April 1992Conservative majority of 21Major-2%3%
1 May 1997Labour majority of 177Blair2%7%
7 June 2001Labour majority of 165Blair-1%-15%
5 May 2005Labour majority of 64Blair-2%9%
6 May 2010Hung Parliament - (Conservative minority)Cameron5%1%
Average  0%-2%

Source: Halifax Sharedealing, based on data from Datastream and House of Commons Library