The impact of elections on investment portfolios

Gabriella Macari, Senior Investment Manager at Arbuthnot Latham & Co., Limited, sheds light on how elections both domestically and internationally can significantly influence investment portfolios. As we progress through 2024, an ‘Election Year’ for nearly half of the global population, the stakes are high. The US election in November stands out as a pivotal event, given that the US remains the world’s largest economy. The familiar saying that when America sneezes, the world catches a cold, holds true. For UK investors, the upcoming UK election adds another layer of political uncertainty.

This brings us to a crucial question: Do elections truly matter for long-term investors? The answer is yes, elections can indeed sway markets and investor sentiment due to potential shifts in government policies across various sectors. For instance, if Donald Trump returns to office, his administration may reinforce protectionist policies, introduce new tariffs, withdraw from global agreements, and make permanent the tax cuts from his first term. Such policy changes can significantly impact trade balances and economic direction.

In the UK, the Labour party currently leads according to recent polls. Should Labour secure a majority, we can expect notable policy changes affecting the economy, taxes, the NHS, and education. These shifts not only affect domestic economic dynamics but also influence international trade and central banking policies, which in turn affect interest rates and currency exchange rates.

However, it is also important to consider that politics and the economy are not intrinsically linked. Election cycles are rarely the dominant theme when discussing long-term market trends. Much of the volatility arising from election speculation or politics is often short-term noise. Historically, the US market, as measured by the S&P500, has performed well during election years, regardless of whether the winner was a Republican or a Democrat. Since 1928, only four election years have seen negative returns in the US, all tied to significant historical events like the Wall Street Crash, World War II, the dot-com bubble, and the global financial crisis. These negative years were not directly attributable to the policies or politics of the presidents in office during those times.

Looking ahead, it is worth noting that investment markets are forward-looking. They tend to ‘price in’ changes in administration or policy as they become more certain. However, markets are not infallible. For example, in 2016, markets anticipated a ‘Remain’ outcome in the UK’s Brexit referendum and a Hillary Clinton victory in the US election. Similarly, in 2019, markets expected a hung parliament in the UK. Surprising results, such as Trump’s 2016 victory or the UK’s ‘Leave’ vote, can lead to swift market recalibrations, often resulting in significant but short-lived swings in stock markets, bond markets, or currencies.

The aftermath of the UK’s Brexit referendum saw a significant sell-off of the pound, but the FTSE 100 ended the day positively and continued to reach all-time highs within six months. Election-driven volatility often peaks in the weeks or months leading up to an election. Amid uncertainty, some investors may reduce risk exposure, waiting for clarity, while others with strong convictions may start positioning for the anticipated outcome. Once election results are known, the uncertainty dissipates, and markets typically return to their usual operations.

In 2024, with numerous elections worldwide, each election’s conclusion will trigger speculation on the next. This cycle of speculation can exacerbate market volatility. However, it is crucial to maintain perspective amid election uncertainty. While elections can evoke strong emotions and seem significant at the moment, it is essential to stay focused on long-term objectives. Despite potential risks and political outcomes that may impact inflation, interest rates, foreign exchange, and geopolitics, capital markets will continue to operate as they always have over the long term.

Short-term volatility can present opportunities for active investors. At Arbuthnot Latham, the Investment Management Committee remains vigilant, closely monitoring markets, news, and performance to meet long-term client objectives while managing short-term risks and opportunities as they arise.

Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.

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