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The election and the outlook for investors

Economic and political commentator George Trefgarne summarises what we know so far.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

As part of our election coverage we’ll be asking expert commentators to share their thoughts. Please remember that these views are the author’s and not personal advice.

The poll tracker published by The Economist puts the Conservatives on 44%, 10% ahead of Labour. Theoretically, this would give a clear Conservative majority on 12 December. However, markets remain cautious due to the numerous recent political upsets.

Changes in political leadership can have a dramatic impact. For example, in the year after Donald Trump was elected, the US stock market rose 22%, helped by loose monetary policy and tax cuts. This became known as the “Trump Bump”. Remember past performance isn’t a guide to the future. All investments can fall as well as rise in value so investors could make a loss.

What of UK markets?

Unless there is a hung Parliament – Labour has progressively been closing the gap with the Conservatives in the last six weeks – a clear election result in the UK would remove some of the political uncertainty overshadowing the economy and delayed investment decisions could be initiated.

Some investors have already started to position themselves for a recovery in UK assets, especially those focused on the domestic economy. Sterling has risen to close to €1.18, a six-month high, and the FTSE 250 has risen nearly 10% since the end of October.

Relative to other mature markets, UK shares have been trading at the biggest discount for 30 years, according to Morgan Stanley. Small cap shares have been at an even bigger discount.

The FTSE 100 index is currently on a 12 month forward price-to-earnings ratio (the multiple of the share price relative to earnings per share) of 14, whereas the FTSE Small Cap is on a multiple of below 10. This 35% valuation discount between the two is the widest for a decade.

Who’s spending what?

Whoever wins the election, investors could find themselves operating in a new, very different environment. Both the Conservatives and Labour are committed to expansionist economic policies.

There has been much focus on Labour’s plans to spend an additional £28 for every £3 the Conservatives have committed to spending and also the individual tax policies of the two parties.

Labour's proposals – pensions and personal tax

Conservatives' proposals – pensions and personal tax

What is not commonly appreciated is that under Boris Johnson Conservative instincts have also shifted away from a balanced budget and towards a more fiscally active policy, financed by borrowing if necessary. The Conservative commitment to a balanced budget is now only for day-to-day current spending, not capital spending.

The Conservative manifesto promises a £100 billion investment in infrastructure. Mr Johnson has said he believes austerity “was just not the way forward” and the remedy for regional inequality is “infrastructure, education and technology”.

The Institute for Fiscal Studies says it is “highly likely” that the Conservatives will spend more than they have costed in their manifesto.

Nor are we talking simply about Government spending, or state-mandated investment in infrastructure, such as low-carbon energy projects and new rail and roads. The manifesto also promises to encourage “a new market in long term fixed rate mortgages”. There are no details and anyway 10-year fixed rates deals are already widely available. But this could be very significant and put yet more money to work in the domestic economy if it results in the Bank of England reducing deposit and capital requirements to enable banks to offer 25-30 year deals at fixed-low interest rates, as they do in Switzerland.

Investors with long memories will recall that plenty can go wrong with government spending sprees. The high spending of the 1960s and 1970s ended in inflation and sky-high interest rates.

However, on this occasion there are huge forces at work, including an ageing population and money printing by the European Central Bank and the US Federal Reserve (much of which is flowing into bonds) holding rates down and even pushing them into negative territory. A bit of reflationary fiscal activism, stirring up the animal spirits, may be no bad thing.

Lessons from history

It is important not to get carried away. Speculating on political outcomes is high risk and there is plenty of time before and after 12 December for further twists and turns in political fortunes.

The 1992 election is an interesting precursor. Investors greeted the surprise win by John Major with euphoria, only to be disappointed a few months later when it was clear the government had lost control of its economic policy as it resorted to 15% interest rates to try and stay within the European Exchange Rate Mechanism.

This time the concern is what happens at the end of 2020. Boris Johnson has promised that there will be no extension of the Brexit transition period, even if a new free trade agreement with the EU is not yet ready.

Nor should we consider Britain alone. According to the World Trade Organisation, global growth in trade has slowed markedly due to the tensions between China and the United States.

In the end, what counts for investors is taking a long-term view and not trying to be too clever by playing the political cycle. If you need help with your plans, seek personal advice.

George Trefgarne is CEO of Boscobel & Partners consultancy and a writer on economics and politics.

Read more of our general election coverage

All our latest expert comment in one place.

General election 2019

HL is not expressing a view on the merits or otherwise of any of the policies or any of the political parties, and nothing in this note should be taken to be an endorsement or recommendation of any particular party, candidate or policy.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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