Markets rarely like political uncertainty and often prove volatile in the run up to and after elections, especially if the outcome is considered unlikely to benefit the economy.
Political uncertainty

Plan your portfolio for
political uncertainty

Political uncertainty

On June 8, the general election resulted in a hung Parliament

Barclays' Chief Investment Officer Arne Hassell; Peter Gordon, Director - Government Relations; and Bill Krupsky, London FX Dealing Desk, share their views on the election result and how this may impact our view of the investment landscape. You can access a replay of the call using the details below:

Dial-in number: + 44 (0)121 260 4861*

Replay pin number: 3562698 followed by #

You’ll then be asked to leave your name and some other details which is optional. Simply press # to begin the recording.

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What a hung Parliament means for your investments

After weeks of wrangling, there was no outright winner of the general election, with both the Conservatives and the Labour party failing to secure a majority.

Commentators suggested that Prime Minister Theresa May called an election back on 18 April to achieve a stronger negotiating position as Britain leaves the EU, with polls generally suggesting that the Conservative government was to gain more seats and remain in power.

The unexpected result has a number of implications, including what this means for Brexit negotiations, and whether a hung Parliament may result in a ‘softer’ Brexit than markets had been anticipating. Given the amount of uncertainty that remains, further volatility for investors is, perhaps, likely.

Here, we assess what the election result could mean for your investments, and how you can protect your portfolio from being rattled by political events.

Market reaction

As with other recent geopolitical events that resulted in an unexpected outcome, there is some inevitable volatility for currency and stock markets. The FTSE 100 index of Britain’s biggest companies jumped in the wake of the election result, but the pound fell in value.1

Sterling fell, amid heightened political uncertainty, in turn pushing up share prices. Falls in sterling have typically supported Britain’s biggest stock market, which holds a large proportion of multinational companies that earn much of their revenues overseas. The exchange rate can have a marked impact on earnings when these are converted back into sterling.

Political uncertainty

Despite the surprise outcome, the result of the general election should not generally prompt you to change your investment strategy over the long term.

The UK’s economic growth forecast remains positive over the long-term. The Bank of England has lowered its economic growth forecast from 2.0% to 1.9% for 2017, but has increased forecasts for 2018 and 2019 to 1.7% and 1.8% respectively, provided there is a “smooth” transition to Brexit and some salary growth over this period.2

During the years ahead, investors would generally be wise to remain focused on their long-term goals, particularly given there are potentially further political headwinds on the horizon. These include Germany’s federal election in September. At present polls suggest current Chancellor Angela Merkel’s centre-right Christian Democrats (CDU) will win a majority, but there are no guarantees she will win a fourth term in office.3

Political turmoil in the US also has the potential to affect markets, with political controversy surrounding President Trump’s ability to deliver his fiscal stimulus and infrastructure plans.

However, the impact of politics on investments can be particularly unpredictable, as demonstrated by events during 2016. The FTSE 100 has reached record highs since the Brexit vote, despite expectations by many of a market meltdown. Nobody knows where the index will go next with any certainty, even if the UK’s exit from the EU fails to go smoothly.

No one can predict for definite which way any currency or stock market index will move next, whatever form the next government takes. Besides which, aside from politics, there are many factors that may affect market movements. These may include inflation, monetary policy, and specific company events.

Maintaining your strategy

Investors who are worried about the impact of the election result may want to review their portfolio, and ensure their investments are spread across a range of assets, including cash, bonds and equities, alongside different industry sectors and geographical regions. This may help reduce any volatility that may result from UK economy jitters, if investors fear Brexit could lead to a recession over the next few years.

Ensuring your investment portfolio is well diversified should mean the assets that perform well help to offset the performance of those that are the weakest, smoothing returns over time. However, all investments can fall as well as rise, and you might still get back less than you put in.

Maintaining a long-term view is also important, and focusing on your particular goals, instead of getting caught up in the short-term impact that a particular event may have on performance.

The longer you stay invested in the stock market, the greater the potential for positive returns.

If you are anxious about where the market may move next, regular investing may help to take the emotion out of your investment decisions. This means you buy more shares when prices are low, and fewer when they are high. However, there are no guarantees that investing regularly will leave you better off. You could still end up with a loss.

Bear in mind that this article is for information purposes only and is not personal advice. It is not a recommendation to act. Investment decisions need to be taken with regard to your individual circumstances If you’re unsure, seek independent financial advice.

References

1 BBC, Election 2017: Pound falls sharply but UK shares rise (June, 2017)

2 Sky, Bank of England cuts growth forecast (May, 2017)

3 Reuters, Nearly half of young Germans back Merkel (April, 2017)


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Remember:

  • The value of your investments can fall as well as rise and you may get back less than you initially invested
  • Investing is not for everyone, if you are unsure please seek independent advice.

Remember:

  • The value of your investments can fall as well as rise and you may get back less than you initially invested.
  • Investing is not for everyone, if you are unsure please seek independent advice.

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