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Is the General Election impacting the UK stock market?

Data released this week by the Investment Association, the industry body representing fund management firms, has revealed that private investors ditched almost £1 billion of UK equity funds in March, the largest such outflow on record.

Jason Hollands Jason Hollands
01 May 2015

Of course there will be a variety of factors behind this news, but one that seems particularly plausible is concerns over the uncertainty of the outcome of next week’s General Election, with opinion polls consistently pointing to no single party winning a majority, and a high degree of support for the likes of the Greens, SNP and UKIP compared to previous elections to add to the mix.

Investor anxieties will no doubt have been amplified by the shrill headlines that have appeared during the election campaign, both from politicians and business leaders. These variously warned about the potential ‘catastrophe’ of either a marked shift to the Left,  a potential vote to leave the EU and the balancing act between spending cuts and taxation in tackling the deficit.

There is no doubt that electors face some pivotal choices next week when they cast their vote on the direction of policies which will impact the domestic economy. Indeed, these factors include the different emphasis on wealth taxes and specific policy proposals that could impact the property market, banking industry, utilities and small business - for example on zero hour contracts.

Important though these considerations are, is it right to be heading for the exit on UK equity funds?  In this respect it is vital to understand that while domestic policy will have an impact on specific businesses, the overall UK stock market is not a reflection of the domestic economy. The UK stock market is dominated by firms which are global in nature, with estimates suggesting that over 70% of the earnings of FTSE 100 companies are generated outside of the UK. This partially explains why – in spite of private investor selling of UK equity funds - so far the markets appear to have shrugged off the impact of political uncertainty.

But perhaps a bigger factor in driving the markets than domestic economic policies, are the actions of central banks, such as the Bank of England and the US Federal Reserve Bank. These have been a major influence on markets in recent years through money-printing stimulus programmes known as Quantitative Easing and the setting of interest rates at record low levels. These types of decisions are out of the reach of the UK’s political leaders.

With inflation remaining very low across the developed world as a result of weak oil prices, and data released this week indicating that both the UK and US have seen growth slow markedly in recent months, fears of near-term interest rate hikes that had been gathering pace several months ago have abated. With ultra-low rates likely to remain in place for now, that should provide a supportive back drop for equities, which is likely to be a bigger medium term influence on the markets than who gets the keys to 10 Downing Street next week.

In any case, as we do not have a crystal ball to predict short-term market movements and we encourage clients to focus on long-term investment strategies and to discard the short-term ‘white noise’ of events. The heightened volatility many expected in the run-up to the election has yet to appear and should it do so in the aftermath of polling day, history suggests that knee-jerk market reactions to events tend to be short-lived.

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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.