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In the run up to the General Election, a lot of clients have been asking ‘what will happen if there is a change in Government?’

At David Allen Financial Services, we acknowledge that political uncertainty can cause concern amongst investors and we appreciate that they will want to protect their nest egg from what is called ‘Political Risk’.

What is Political Risk?

Political risk refers to the risk that an investment’s returns could be adversely affected due to political changes or instability in a country.  There is the risk that the markets could favour one result over another and the risk that a new government with a new mandate to govern may start to treat some investment products differently.

Without the benefit of a crystal ball, nobody can say exactly what will happen in the coming days or whether one result will be more favourable for your investments than another.  However, we can look at what has happened in the markets before and after previous General Elections to help us understand the impact of general election results on investment markets.

What does history tell us?

Historical data shows us that in the UK, stock market reactions to elections have been relatively flat to down in the six months following election results, this is on average, irrespective of what the actual result is.  There are some notable trends, for example after Labour victories, the MSCI UK index of large to mid-cap stocks, tends to rise by approximately 6% in the six months after Labour Party victories, following Conservative Party wins, the index tends to decline by around 5%.  The more domestically-oriented FTSE 250 tends to outperform the FTSE 100 following elections, with stronger outperformance after Labour victories.  Defensive stocks and financials generally perform better post-elections, while energy stocks perform well regardless of the party in power.

The FTSE All Share tends to perform differently based on election outcomes, when the keys to 10 Downing Street change hands (i.e. a new government is elected) the FTSE All Share typically performs better in the year following the election. Conversely, when the incumbent government wins, the market’s performance is more subdued.  On average, the FTSE All Share has risen by 12.8% in the year after an election when the government changes hands.  In contrast, when an incumbent government wins, the FTSE All Share has inched up by an average of only 0.9%.

In summary

Overall, long term investment performance has never been significantly impacted by the colour of the rosette worn by the victorious party, this is because a wide range of factors affect investment performance and only some of them are controlled by Westminster.  Currently, the Bank of England Base Rate remains high at 5.25% as such, the likelihood of a potential rate cut, in the coming months, is quite high and a sequence of rate cuts could fuel a market rally; the Bank of England operates independently of Government, so rate cuts or indeed increases can occur irrespective of the governing party.  In addition to this, there is the impact of other countries on world markets, there are elections taking place later this year in much bigger market places than the UK, for example the US Presidential Election.  Most investment funds have a higher weighting of US equities than UK equities so whilst it is important to consider the impact of our own election, we must be aware of the bigger picture.

This brings us on to another one of the major factor in how your investment will perform, that is it’s asset allocation, or how your funds are invested and what percentage is allocated to each available asset class.  If you don’t know how your pension, ISA or other investment product is asset allocated, it will be impossible to gauge how much or how little a potential change in government here or in the United States will affect your plans.  Interestingly, while you have very little control over the outcome of an election, you have total control of your asset allocation and we can help to ensure that you have this element of your financial planning right.

Give us a call on 01228 711888 or 01387 270340 or email mail@david-allen.co.uk if you would like to discuss this subject or any of your financial planning needs.