The UK election has been announced for December 12 and is likely to be the biggest - perhaps only - talking point between now and Christmas.
While these are uncharted waters, political uncertainty is nothing new. On this occasion, as in the past, people will jump over themselves to tell you the “right way”. Whether we are judging the merits of the candidates or working through our investment positioning, we must favour research over reaction and urge other investors to do the same.
Chief among these is the temptation to react too quickly or with too much confidence in the lead up to the outcome of this significant event.
If you are cynical of this stance, I share the below quotes from the US election and Brexit referendum, where even the smartest of people got it grossly wrong:
Incorrect US Election 2016 Predictions
“We would expect a small global stock market rally if Clinton wins (about 2%) and a large decline if Trump wins (about 10%)”. Eric Zitzewitz, Professor of Economics at Dartmouth College
“The S&P 500 will fall by 3% to 5% immediately if Trump is elected”. Tobias Levkovich, Citigroup's chief US equity analyst
“If investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.” Simon Johnson, professor at MIT Sloan and former chief economist of the IMF
What actually happened? US stocks rallied 2.22% on the day after the election and around 9% in the three months following.
Incorrect Brexit Referendum Predictions
“A vote to leave would tip our economy into year-long recession with at least 500,000 UK jobs lost”. George Osborne, former Chancellor
“Leaving Europe would tip the country into recession”. David Cameron, ex-UK Prime Minister
“Brexit would trigger recession” - IMF, predicting -0.3% GDP for Q3
“Short term impact of -1.25% GDP”. OECD forecasts
“It would be likely to have a negative impact in the short term… I certainly think that would increase the risk of recession”. Mark Carney, Bank of England
What actually happened? UK stocks fell 3.15% the day after the referendum but gained around 13% in the six months following. Economic growth also continued to rise.
What About a Corbyn Government?
Putting any political biases aside, one of the widely quoted risks to investors seems to be in a Corbyn government. It is easy to build an ugly bear case, and we are mindful that the media will take full advantage of this fear-driven sentiment. We urge investors to keep a level head and while these issues have substance, investors should look through exaggeration as political risk is largely unpredictable.
It is for circumstances like this that we take a diversified approach. We don’t go “all in” on a given outcome, because we can limit the risks by spreading your eggs across multiple baskets. We have global exposure, defensive exposure and different currencies, to name a few, which would all help buffer any election risks.
Opportunity Knocks
The key question on many investors lips is whether they should sell, hold or buy. The answer is simple: manage risks, stay informed and if in doubt, stay the course.
The current period is very unsettling for investors and will cause debate among your families, but any turbulence in markets may create great opportunities to purchase assets that will add meaningfully to returns in the future. We are not there yet, but we will look at this opportunistically.
