How to invest ahead of the general election

On the same day inflation softened to a three-year low, Prime Minister Rishi Sunak decided to push the button and call a general election for 4 July.

The move surprised most political analysts, who had expected the election to take place in the autumn.

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Ahead of the campaigning and millions going to the polls in around six weeks’ time, what are the implications for investors?

Which political party has been best for stock markets?

Well, the first point to make is that despite the competing claims of all political parties, no one has absolute bragging rights when it comes to their records as judged by stock market performance.

True, in real terms, Conservative governments since the Second World War have delivered average stock market gains of 23.2% per term, as measured by the performance of the FTSE All-Share index; the corresponding figure for Labour administrations is a loss of 13.7%.

However, those figures are skewed by the fact that Labour was in power during the oil price shock of the 1970s and the global financial crisis of 2008, both of which proved disastrous for share prices.

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In fact, both Conservative and Labour governments have presided over both strong periods of stock market performance and weaker periods. In recent times, during David Cameron’s 2010-15 government, the UK market rose 26.3% in real terms, while Tony Blair’s 1997-2001 government delivered 22.5%. Less happily, the market fell 25.7% in real terms during the Blair government of 2001-05, as the dot.com collapse hit returns, and during Theresa May’s term in office between 2017 and 2019, share prices fell 6.4% amid post-referendum Brexit wrangling.

Broadly speaking, however, stock markets like certainty – and there is one outcome that could cause problems, warns Ben Yearsley, a director of Fairview Investing.

“I wouldn’t rule out a minority Labour government,” he says, floating the prospect of no single party winning an outright majority in the House of Commons. “It is this prospect that could spook markets; in which case, investors would want exposure to overseas investments as the pound might depreciate and international holdings would provide some protection.”

FTSE 100 at record high ahead of nation going the polls

It is also worth remembering that elections don’t happen in isolation. The backdrop to the run-up to the vote is that the UK stock market – or at least the FTSE 100 index of shares in the largest companies – is already trading at record highs. “History shows that the FTSE 250 index of medium and small companies, mainly domestic, performs better around the election months,” adds Dzmitry Lipski, head of funds research at interactive investor.

However, Lipski’s says the best course of action is not to get too hung up on the election. He says: “Don’t try to predict the outcome but invest for the long term. Regular investing should help with market volatility.”

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Moreover, if you are feeling anxious about the potential for political uncertainty to cause problems, there are ways to build some protection into your portfolio.

“Prepare for volatility through conventional defensive assets such as UK gilts, gold and possibly silver,” Lipski suggests. He adds if investors are looking to focus on capital protection, consider Capital Gearing Ord (LSE:CGT) trust. This investment trust has the freedom to invest across multiple asset classes and has a good record of preserving investors’ capital.

The good news is that because both the Conservatives and Labour are relatively centrist, an outright victory for either would be unlikely to give investors sleepless nights. “Keir Starmer’s Labour does not have the same scare factor that Jeremy Corbyn’s Labour might have had,” says Scott Gallacher, a director of independent financial adviser Rowley Turton.

Gallacher adds: “In any case, we are already in a high-tax environment, so it’s not like we will see a huge increase in taxes, [one fear sometimes associated with Labour].”

The sectors and shares the pros are eyeing up

Indeed, at the macro level, there is not a great deal to choose between the two main parties. Labour has pledged to stay within the same fiscal tramlines as the Conservatives, with the aim of balancing the budget over the economic cycle and a promise not to raise income tax. Shadow chancellor Rachel Reeves says a Labour government would be prepared to borrow to invest, but only within clearly defined fiscal rules.

Still, with Labour riding so high in the polls, some fund managers are beginning to eye opportunities at a sector and stock level that a change in government might create.

“We need significant investment in public infrastructure such as transport, hospitals, the electricity grid and our water networks, and historically, we would associate Labour governments with a higher level of public investment in these areas,” says Laura Foll, co-manager of Henderson Opportunities (LSE:HOT), Lowland Ord (LSE:LWI) and Law Debenture (LSE:LWDB).

Foll says this could benefit contractors, as these are the companies likely to be putting shovels in the ground on major projects. She adds: “Holdings in these types of businesses, such as Kier Group (LSE:KIE), have performed well recently. In large part this is down to better pricing discipline among contractors following several large corporate failures in the preceding years but there may also be an element of anticipation of higher infrastructure spending post-election.”

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Ambrose Faulks, co-manager of the Artemis UK Select fund, has another suggestion, although he warns that it may be too late to benefit. “Social and affordable housing should come more into focus under Labour, which would benefit holdings such as Vistry Group (LSE:VTY) and Morgan Sindall Group (LSE:MGNS),” he says.

However, Faulks cautions: “But anyone thinking they can profit from spotting the post-election winners and losers now should bear in mind the big gap in the polls – a lot more is already priced into the stock market than ahead of previous elections.”

William Tamworth, fund manager of Artemis UK Smaller Companies, is also thinking about private sector businesses in line to win taxpayer-funded contracts.

He says: “We have quite big holdings in companies such as Serco Group (LSE:SRP), Babcock International Group (LSE:BAB) and Mears Group (LSE:MER) that win public sector contracts as outsourcers.

“There is a perception that these sorts of companies do better under Conservative governments, but it was the New Labour administrations that really established the sector.”

On the downside, some analysts are concerned about the outlook for the oil and gas sector under Labour. The party has promised a series of levies on the industry to fund the cost of investment in green initiatives. But investment bank Stifel has warned that the proposals would hit the sector’s profitability hard; it thinks the UK’s oil and gas output could halve by 2030.

Overall, however, both Faulks and Foll also wonder whether a change of direction might support the market more broadly.

Could the election prove the catalyst for investors to return to UK stock market?

“Given that Brexit appears to have been the catalyst for eight years of outflows from UK markets, there is the opportunity for a new government to reset the relationship with Europe and, perhaps even more importantly, alter the international perception of the UK,” says Faulks.

Foll adds: “UK shares look attractively valued at the moment relative to overseas peers; an election might be one of the catalysts we’re waiting for to trigger a correction – it could remove the current stasis in certain areas of the market.”

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Foll points out that businesses and investors are waiting for direction from government in areas including regulation of the energy sector, planning laws and even whether Royal Mail (International Distributions Services (LSE:IDS)) should be allowed to deliver less frequently.

The bottom line is that until the political parties all publish detailed manifestos, making accurate assessments of their potential impact on the economy and individual industries is difficult. But the consensus is that the effects of the election – whoever wins – are likely to be nuanced.

For investors, this means the election should one just one consideration among many as they plan for the years to come; the more important questions are around your time horizons, your financial objectives and your attitude to risk.