The 2019 UK election has been announced for December 12 and is likely to be the biggest – perhaps only talking point between now and Christmas. Today is the first day of official campaigning….
While these are uncharted waters, political uncertainty is nothing new. On this occasion, as in the past, people will get on with their day jobs, and life will move on irrespective of the result. Maybe the election result will provide more clarity with regards to Brexit or maybe it will return even more uncertainty. Maybe markets will go up with the result or maybe they will go down. Regardless, people will still wake up and resume their lives and the economy will function as it did. This is an important point to remember.
In times of political uncertainty, we know that people tend to hold off on plans, particularly financial plans, whether that be a big-ticket purchase, or booking a holiday. It is the natural reaction to be hesitant during times of uncertainty.
Chief among these is the temptation to react too quickly or with too much confidence in the lead up to these significant events. Politicians and Financial Big Whigs are very guilty of this. 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 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 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. When I meet with clients, it is a fear that is mentioned almost as many times as Brexit. It is easy to build an ugly bear case, in which the media will no doubt take full advantage of between now and election day. Therefore, we urge investors to keep a level head and while these issues have substance, investors should look through exaggeration as political risk, which is largely unpredictable. Just as we seen in the 2016 Referendum & the US Presidential Election.
The key question on many investors lips is whether they should sell, hold or buy during these unpredictable times. The answer is simple: investments are made for future gains, therefore if you are looking to buy, continue to buy assets based on their merits and their ability to provide future returns. Short term events should not influence your long-term investment strategy. Of course, we all need to manage risks, and stay informed and if in doubt stay the course. The best investors are the ones who seek out opportunity and stay the course.
There is no doubt the current period is very unsettling for investors and will cause debate among your families, it certainly does mine. If you are lucky or unlucky enough to follow me on Facebook, you will know that I am never too far away from political or financial debate amongst friends and family.
In terms of making financial decisions – any turbulence in markets may create great opportunities to purchase assets that will add meaningfully to returns in the future. We therefore look at this current period through the prism of opportunity, rather than fear.
In case you are wondering the moral of the story is – buy that new sofa, book that holiday, continue as normal, as life and the economy will tick over, and we will all carryon regardless.