Over the past 12 months, the world has become accustomed to surprising political results. Could this week’s UK general election present financial markets with another?
As the UK prepares for the general election on Thursday 8th June, polls have shifted over the past week to show a rise in support for the Labour party. While the Conservatives remain ahead overall, this is in sharp contrast to polls released shortly after the election was called, which suggested the Conservatives would win by a strong majority.
How would financial markets vote?
Markets typically favour stable political leadership. So, the perceived ‘market friendly’ outcome of the election would clearly be a Conservative victory by a strong majority. In fact, after the initial election polls were announced, the pound sterling strengthened against the US dollar to its highest level since September 2016.
A continuation of current policy avoids disruption, and the markets regard a larger Conservative majority as strengthening the prime minister’s negotiating position on Brexit and increasing the likelihood of compromise to achieve a deal – with no deal and a ‘hard Brexit’ perceived as the most market-unfriendly outcome.
On the other hand, a Labour victory is likely to be perceived negatively by financial markets, at least initially. The potential for higher borrowing, re-nationalisation of sectors such as rail, energy and water, and the uncertainty that political policy change creates would be major areas of concern for financial markets.
Markets not yet worried
Labour’s rise in the polls may have the Conservatives worried, but markets have not yet started to panic. A Labour victory remains a remote possibility at this stage, with the majority of polls still indicating a comfortable Conservative victory.
However, as both the EU referendum and the US election showed, polls are not always an accurate way to predict political outcomes.
What does this mean for my investments?
At Nutmeg, our investment team continually monitors financial market, economic and political activity and adjusts our fully managed portfolios to manage risk and take advantage of market opportunities.
As we’ve discussed before, our approach to risk centres around ensuring our portfolios are highly diversified, spreading your investment(s) globally across many financial markets and assets. And as we showed in navigating many of the major political events of the past 12 months, diversification matters.
Our investment team will continue to monitor the election polls and potential outcomes, and make changes to our clients’ portfolios as necessary.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.