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How To Trade The UK General Election

Photo credit: Ferry Vermeer

As a species, we human beings favour action.
 
Perhaps not actions like going for a jog or mending that leaky tap in the bathroom.
 
But certainly low-calorific actions like pressing a button in our online share-dealing accounts.
 
This desire to ‘do something’ served us well in our prehistoric days on the Savannah.
 
Our ancestral action-takers dodged life-threatening bites, blows and bludgeoning on a daily basis.
 
Whereas the more easygoing who muttered, “Lion? Meh…” did not live to tell the tale – or to pass on their genes.

Brace yourself

I can hear the impatient descendants of all those elephant evaders, cheetah cheaters and dingo dodgers growing restless.
 
How should we ‘trade’ the UK General Election? What action is best to take? What should we do?!
 
Well, I’m going to disappoint you. But in my view you probably shouldn’t do anything.
 
Feel let down?
 
I must confess I wrote the headline knowing many more people would click to read this article than my splendidly wise one about ISAs the other week.
 
Opening an ISA early and investing for the long term?
 
Boring!
 
Selling out of the UK market to sidestep the ruinous impact of a hung Parliament and then swooping in after a second General Election to pick up cheap bargains following weeks of staring into the abyss of a multi-party Mexican stand-off?
 
Now you’re talking!

Political posturing

It’s easy to construct frightening narratives about the fate of witless investors who do nothing in the face of the closest election in generations.
 
But what makes for a compelling headline is not necessarily a sound investing strategy.
 
If a pundit told you that some coalition-combo meant you should stick your head in the oven, would you do it?
 
Then why trade your portfolio on similarly flimsy claims?
 
Here are five reasons to leave well alone instead.

1. The UK is a very small proportion of the global market

Sensible investors have international portfolios, and the UK represents just a portion of their assets.
 
The UK’s share of Vanguard’s Total Stock Market Index fund ETF is 7.45%, for instance.
 
Of course, like most people you probably have more at home than abroad – but hopefully it’s not all or nothing.
 
Whether you invest passively, actively, in funds or shares, or in a mix of them all, I think the UK should only be part of the picture.
 
On the global stage, this election is small fry.

2. Most UK earnings are generated elsewhere

But even sticking with UK shares, over 70% of the FTSE 100’s earnings are earned overseas. And foreign economies will not be affected by the results of our General Election.
 
This also means there are natural hedges in place so that even a negative election result could be a wash for UK investors.

For example, let’s say a coalition was formed that was seen as unstable or anti-business or fiscally reckless, and therefore bad for the UK economy.
 
In such an instance the pound might fall, perhaps sharply. This would boost those overseas earnings, which in turn could increase the attractiveness of owning UK shares that earn money overseas.

Swings and roundabouts!

3. It doesn’t matter which major party wins

Most of us have tribal affiliations, and we favour one party over another.
 
But those loyalties aren’t particularly useful when evaluating the potential for the stock market.
 
According to data compiled by Hargreaves Lansdown, the Conservatives have delivered the strongest returns for UK investors, with an annualised return since 1970 of 16%, compared to 9% for Labour.
 
However, these statistics are skewed by the near-50% fall in the UK market in the nine-month reign of the last minority Labour government in 1974.
 
I’d keep in mind there that the bear market crash of the 1970s was hardly a UK-only phenomenon. The global economy was mired in stagflation, and UK inflation was already approaching 20%. Oil prices had quadrupled in a matter of months due to OPEC action.
 
Those are very different circumstances from today.
 
A more convincing piece of pro-party data from Hargreaves Lansdown is that someone who put £1,000 into UK stocks when Margaret Thatcher came to power would have seen it grow to £20,000 by 1997 and the coming of New Labour.
 
Some of that growth was down to the economic policies of the day, no doubt.
 
But again it was also a global phenomenon. US investors did at least as well.

4. Returns have been fine under the Coalition

Of course, there’s about as much chance of a first-past-the-post winner of this Election as of Russell Brand becoming Prime Minister.
 
True, but I don’t think that’s a reason for fear.
 
We seem to have a visceral loathing of coalition, compared to our continental cousins, yet I’d argue the muddle-through nature of the past five years was what we needed.
 
More importantly from an investing perspective, the returns were fine – up 9% a year annualised, or over 50% all-in.
 
We can’t know if we would have done better if one party had won decisively, but a coalition clearly isn’t a nailed-on disaster.

5. It’s probably too late, anyway

Of course, there are some individual companies that might be impacted by particular results on 7 May.
 
I’m thinking of regulated utilities like Centrica (LSE: CNA) and UK-focused sectors like housebuilders and the supermarkets.
 
Some small caps are often very domestic plays, too.
 
However, the market is a discounting machine. It looks forward to take into account new information.
 
Everyone knew an election was coming, and we’ve known for months it’s likely to be tight.

Therefore I think prices already reflect most likely outcomes.
 
If anything, I’d be more inclined to hunt for bargains at this stage.

If in doubt, do nothing

I don’t say this election will have no consequences for investors.
 
Different rules about pensions, property taxes and inheritance could make a big difference to our personal wealth.
 
Also, there could be consequences down the line, in particular from a referendum on EU membership.

However, I think the outcomes are uncertain enough – and the costs and risks of trading your portfolio large enough – that it’s probably better to sit tight.
 
Perhaps reconsider whether you’re over-exposed to the UK if you are very concerned about the election’s impact on your portfolio.
 
International diversification is cheap and easy nowadays.
 
Otherwise, cast your vote at the ballot box, not with your broker.

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