Electing to invest – for the long-term
This year, so far, the stock markets have held up fairly well, despite all the noise out there in the marketplace, with the FTSE100 running at around 3% above its end of 2014 closing figures.
This could be due to the fact that the UK had a reasonably good year last year, with the economy up 2.6%, plus the markets responded well to the ECB finally introducing quantitative easing (QE) in Europe. To date, whilst there is concern over the possible ‘Grexit’, the markets have been holding up surprisingly well.
However, it all feels like the calm before the storm. So where is this possible storm going to blow in from? Apart from the possible Greek tragedy on our doorstep, one other likely source is the forthcoming general election, which is less than 3 months away.
The reality is that many election years do not have a great deal of direct impact on the UK economy. For example, Margaret Thatcher’s victories in 1983 and 1987, along with Tony Blair’s in 1997, 2001 and 2005 respectively, all coincided with periods of strong growth and saw no major post-election slowdowns.
However, the markets sometimes react differently. Taking an ‘election year’ as starting six months before, and ending six months after the actual vote, the UK market has risen in five of the last six election years, whilst witnessing volatility along the way.
For example, Margaret Thatcher’s third win in June 1987 was a comfortable result and the over the election year the market grew 5.4%. However the period also saw a 30% market fall. This huge market movement was had nothing to do with the election though; it was the 1987 stock market crash, which started in the US before spreading across global markets.
Tony Blair’s win in May 1997 was a great time for the UK stock market, which grew 21.8% over the election year. However, this was not all due to any ‘Blair factor’, as the US and European markets returned even more, with stock markets across the developed Western world all doing well.
By contrast, Tony Blair’s win in June 2001 saw the UK market fall by -12.3% in the election year. Once again, this had little to do with UK politics but was down to markets witnessing the tech bubble crash and then the terrible events of 9/11.
So as can be seen from these couple of examples, whilst the UK election is significant, the UK stock market tends to be driven more by global events. This is understandable when you recognise that around two thirds of the revenues of FTSE 100 stocks come from overseas.
However, as well as any volatility provided by global markets, this time there is the added impact of possible political uncertainty in the run up to and aftermath of this year’s election. Markets hate uncertainty and this time there is a good chance that the election result will be inconclusive.
From an investor’s viewpoint, the main message is therefore to be prepared for some short-term volatility but not to panic unduly. As always, it is best to focus on the long term when it comes to investing. In years to come, when looking back on the market performance in 2015, it is more likely that it won't be just the election we are talking about.