The decision by Theresa May to call a snap general election could be a blessing in disguise for long-term investors. Certainly, the FTSE 100 has fallen by over 200 points since the announcement and more declines could be ahead. However, it means the same high-quality companies are now available to buy at an even lower price and with a wider margin of safety. In the long run, this could equate to higher capital gains.
Short-term risks
Of course, in the short run a general election brings higher risks. The opinion polls may state that the Conservative party has a generous double-digit lead over Labour. However, as the 2015 election, the US election and the EU referendum showed, pollsters can be very wrong at times. As such, investors may wish to be somewhat cautious towards the polls in the upcoming election. The size of majority for the Conservatives or indeed the outcome of the election could be vastly different to the one which is currently predicted.
This uncertainty brings with it a degree of risk. While the current government has a slim majority, there is no guarantee that a government with a larger majority will be in place on 9 June. A smaller majority or even a coalition government could be the end result, which may lead to even greater instability ahead of Brexit talks. Such a situation could lead to share price falls and may reverse the gains of the FTSE 100 over the last couple of years.
Long-term opportunity
While share price falls may be somewhat disappointing in the short run, they also provide a superb buying opportunity for the long run. History shows that the most opportune moment to buy shares is when the future outlook is most uncertain. And with a general election plus Brexit ahead for the UK, the country faces perhaps its greatest political and economic upheaval in a generation.
Furthermore, most investors are net buyers of shares at the moment. With inflation rising, assets such as cash and bonds are relatively unattractive. In fact, in many cases, cash and bonds will fail to offer a positive real-terms return over the course of the next couple of years. Similarly, property remains relatively unattractive due to changing taxation rules and a housing market which is cooling.
Therefore, most investors are likely to be buying more shares than they are selling over the next couple of years, which means that the general election and the resulting share price falls could not have come at a more perfect time. That’s especially the case since greater uncertainty may lead to weaker sterling over the medium term. This could provide an additional boost to international companies listed on the FTSE 100.
Takeaway
The outlook could worsen for the FTSE 100 and for the UK economy as a result of the general election. At the same time though, falling share prices could be a good thing for long-term investors as they mean wider margins of safety will be on offer. While volatility may be a challenging experience for all investors, it could lead to higher profitability in future years.
