How investors can best protect themselves against the full range of election risks
10 December 2019
By the end of this week we will have chosen our delusion. Buccaneering Britain or Caracas on Thames. Both the main parties’ prospectuses are a kind of deception, the one unachievable, the other unaffordable. Many voters will regret that it has come to this.
Given the political Hobson’s choice, it’s not unreasonable to focus instead on what the election might mean for our finances. With two days to go until election day is there still time to do anything to capitalise on or protect ourselves from the potential outcomes?
There are three key questions. What could go right and what wrong on Thursday? What will happen whoever wins? And, even if we can predict this week’s result, what if anything can we still do about it?
A couple of weeks ago, I hosted a panel discussion on the outlook for markets in 2020. One of the contributors, Merian’s Richard Buxton, went out on a limb to predict a Brexit Bounce on the back of an expected Conservative majority. He said resurgent consumer confidence, the promise of increased fiscal spending and, in due course, improved business sentiment too would allow the UK market to shake off its pariah image among international investors. He expects Britain to be among the fastest growing G7 countries by the end of next year.
James Thomson from Rathbones said he was starting to warm to the UK but remained some way from boiling point. Having reduced the UK exposure of his Global Opportunities Fund three years ago from 25% to 5%, he could hardly cool any further on the domestic market, so it felt like he was being polite. Ayesha Akbar, a multi asset manager from Fidelity, liked the fact that you had to go back to the 1970s to find a time when there was so little interest in the UK stock market, but she too couldn’t muster much enthusiasm.
I agree with all of them. A Conservative win this week will probably lead to a short-term rally for the UK stock market, although the impact will be tempered somewhat by a likely rise in the pound. Stronger sterling would act as a drag on the more export and overseas earnings-oriented FTSE 100, so expect the mid-caps to outperform in any rally.
I also fear that the market’s enthusiasm might be short-lived, as investors quickly focus on the challenge of getting a trade deal done by the end of 2020. Realistically, such a deal needs to be ready to go by the middle of the year to allow all 27 EU members to sign it off in time. That doesn’t sound do-able and investors will soon begin worrying about another no-deal cliff edge.
The alternative, a Labour majority, would see shares go the other way in the short-term. The poisonous cocktail of nationalisation, higher corporate taxes, a squeeze on higher incomes and unfunded spending promises would dent investor confidence in UK shares, gilts and the pound. The good news is that the polls make this outcome unlikely. As it stands, the risk-reward balance argues for maintaining or even slightly increasing the UK weighting on a short-term, tactical basis.
That’s the market question, which is the easiest to do something about at short notice. The personal finance question is trickier. When it comes to income tax, there’s not a whole lot you can do. If you are sitting on uncrystallised capital gains, now might be a good moment to capture them while the
higher rate of CGT remains at 20%. Again, I wouldn’t assign a huge probability to a 50% CGT rate any time soon but better safe than sorry.
What will happen regardless of whether it’s Boris Johnson or Jeremy Corbyn in Downing Street on Friday? Given the populist tilt of our polarised politics, we should expect more spending, more borrowing and higher taxes for the foreseeable future. At a personal level that means maximising what breaks there are in the form of the still generous ISA and SIPP allowances. When it comes to asset allocation, it makes home bias even more risky. With the UK representing only 6% or so of the value of global stock markets, it should not account for much more of your portfolio either on a longer-term view.
The final question - what would we do if we knew the result ahead of time - is also less obvious than it might seem. Sometimes it is better to travel than to arrive in investment and the market reaction to an event can be precisely the opposite of what intuitively you might have predicted ahead of time. The 1979 election of Margaret Thatcher is a good illustration of the contrary nature of markets.
Markets entered 1979 in a funk. With 25,000 lorry drivers on strike, speculation rose that a state of emergency would have to be announced to keep essential services running. Events in Iran threatened a new wave of oil price increases. The breakdown of the Government’s pay policy made a return to double digit inflation likely.
As the winter of discontent led to the near certainty of a spring election, however, the UK stock market picked up steam, with the FTSE All Share index rising from 219 in early February to a peak of 283 on the day after the election in May. Investors welcomed the rejection of Labour’s renewed pledges to grab further control of industry, impose a wealth tax and extend the powers of the Price Commission (sound familiar?). They embraced the prospect of union reforms, lower taxes, control of the money supply and a withdrawal of government intervention in pay bargaining.
Unfortunately, the Friday after the election was a high-water mark for investors. The All Share did not reach that level again until the summer of 1980 as the scale of the challenge ahead became clear. Be careful which delusion you choose this week.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment on pensions depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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