What price politics?
Last week the Prime Minister finally announced what has been widely expected for months – that the General Election will be held on May 6th, Campaigning has now begun in earnest and we can expect the next few weeks to be dominated by political posturing and the media firmly focussed on the forthcoming polls. There has been much made of the uncertainty generated by the situation we now find ourselves in with relation to the stock market, but how much impact does a General Election really have?
Looking back over the past five elections it seems that despite all the hype during campaigns returns are fairly similar to normal; with average rises between the day of the announcement of the election and polling day being relatively modest. In fact market volatility during campaigns has been lower than average. This implies that, generally speaking, election campaigns do not introduce greater than normal uncertainty into stock markets. There are a number of reasons for this. Firstly the UK market is a global one and its fate depends increasingly on global forces that are unaffected by the election campaign. Secondly, the outcome is not obviously related to uncertainty about the economy in general, despite what the politicians would have us believe. It is far from clear how much direct influence politicians have on the fate of the economy and the market recognises this. Finally and quite simply, it has been relatively easy to predict the outcome of most of the General Elections over the past 25 years. The one exception was the unexpected victory by John Major in 1992; this led to a strong relief rally straight after the election. Thus despite all the media attention, the overall effect on the market may be quite limited.
How should we be viewing the stock market in this context? It would probably be wise to focus on the market itself, not politics. It has seen an incredibly strong run up over the past year and many observers are now calling time on this almost unbroken rise. It is important to note what has driven this: initially it was oversold and the recognition of this fact started the reversal of its fortunes. The overwhelming driver now does not appear to be value (there is no doubt that it is not overwhelmingly “cheap” in the way it was twelve months ago) but rather liquidity; with interest rates so low there are limited alternatives for investment that will produce a decent return. We have experienced dividend cuts, or in the case of the banks no payments at all, thus the recession has had a significant impact and we are not out of the woods yet. However, it is possible to identify good yields which are well covered by earnings and as we have seen the traditionally defensive sectors (where dividend yields are usually relatively high) generally underperform the more volatile and cyclical stocks, there is still plenty of choice. The message is then, to look through the political “noise” and for now focus on return.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.