Weathering a general election: what history says

Graham Smith, Market Commentator, 17 May 2017

It’s supposed to be better to travel than arrive and the travelling in the run-up to this general election has been easy so far. In the month since Theresa May called a snap election, the pound has gained ground and the FTSE 100 Index has risen to another record high1.

The inference is that markets are content with the likely prospect of a full five years of majority government with a bigger mandate than last time. That would mean less uncertainty – no election in three years time when the economy might be doing less well – and the ending of a government whose slender working majority could conceivably be tested by by-elections.  

Will the result surprise us this time? The opinion polls suggest probably not.

As we know from the last UK general election in May 2015 and the US presidential election last November, the polls can get it wrong. However, it’s hard to envisage the polls being so wrong as to be recording a 10% error – half the current, albeit reducing gap between the Conservatives and Labour2.

However, that does leave markets with something of a problem. There may be little if any scope for a relief rally after polling day if the possibility of another slim working majority has already been ruled out. 

There’s also the issue of what policies the next five years might bring. The government’s apparent shift to capture left-of-centre voters has been reflected in plans to cap energy prices. Last seen as a pillar of the Labour Party’s election manifesto in May 2015, the implications of this are extremely sector specific.

Centrica and SSE – the two UK listed large energy suppliers – saw their prices fall last month, although those falls were muted3. It’s as if these stocks are pricing in the earnings risk a cap might bring, but a high probability of a watered-down or deferred implementation too.

A manifesto pledge to enhance workers rights follows in the same vein. However, plans to raise the national living wage in line with average earnings until 2022 is likely to fall significantly short of George Osborne’s 2015 Budget pledge of £9 by 20204.

So will the stock market’s apparently sanguine view of this election last? If history is anything to go by, that’s hard to say.

An outright Conservative majority in May 2015 was treated initially as a positive surprise, but the market started to retreat soon after5. It was almost as if it had priced in the result. Stocks had advanced strongly in the first four months of 2015 – even as most opinion polls were pointing to a hung parliament.

Other elections from the recent past provide a mixed picture. The landslide election victories of the Conservatives in 1987 and Labour in 1997 were preceded by months of stock market gains; but Labour’s second landslide in 2001 was not – from the point of view of markets, it was lost in the midst of the bursting of the dotcom bubble.

Labour’s second win was also followed by the 9/11 attacks just three months later, which put paid to hopes of a recovery. Earlier, in 1987, a win for the Conservatives was followed in fairly short order by the stock market crash6.

One inference from this glance at the relatively recent past could be that the expectation of a landslide victory, both for Labour and the Conservatives, may act as a support in the approach to a general election. However, other events predominate thereafter.  

This time round, investors can take encouragement from a reasonably strong UK economy and underlying fundamentals that support the case for the stock market. In fact, these fundamentals, along with raised hopes for an OPEC oil production cut, may account for more of the market’s recent buoyancy than politics.

UK interest rates remain at a record low and are likely to stay low over the medium term thanks, in part, to the Bank of England’s caution over Brexit risks. By comparison with the interest rates available on cash deposits, the dividend yield of the FTSE 100 Index, 3.8% at the end of April, looks attractive6&7.  

Whatever the market’s response after 8 June turns out to be, Fidelity’s Select 50 list contains several UK equity funds with highly selective investment strategies designed to capture long-term winners. Among these are the JOHCM UK Dynamic Fund and the CF Lindsell Train UK Equity Fund.

The JOHCM UK Equity Income Fund and the Fidelity Enhanced Income Fund are aimed at investors seeking a regular income from shares together with the potential for capital growth. Both funds have a record of achieving a higher dividend yield than the stock market generally.


1 Bloomberg and BBC News, 15.05.17

2 Electoral Calculus, 14.05.17

3 Bloomberg, 15.05.17

4 BBC News, 08.07.15

5 London Stock Exchange, 16.05.17

6The Telegraph, 10.04.12

7 FTSE Russell, 28.04.17

Important Information

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