If your guess is as good as his, how do you invest?
Anyone who follows politics, whether from the right or the left, will remember 10pm on the night of 5 May for quite some time. After being told for weeks to expect a hung parliament, and listening to days of speculation about who might form a deal with whom, the election exit poll suddenly painted a very different picture. As the first results came through, it turned out the Conservatives were cruising towards a surprisingly comfortable overall majority. The polls had been spectacularly misleading.
The performance of polling companies at the British election of 2015 was worse even than the 1992 Conservative victory, which did at least show some late swing towards the Tories ahead of the election itself. But it was hardly the first bad call of the year. The Israeli elections were equally bad none of the polls predicted that Benjamin Netanyahu's Likud party would secure a victory.
Likewise, in Poland's recent presidential election, none of the polls forecast that the incumbent Bronislaw Komorowski would lose. And the last US Congressional elections were another major misstep. In each case, the polling companies have launched enquiries into their methodologies to try and work out how they got it so wrong.
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You can debate the reasons for what is happening. One explanation is that the rise of mobiles means that traditional telephone polling only reaches a narrow section of the population (the declining number of people who both have a landline and bother to answer it). It might be that fewer and fewer people tell pollsters the truth, especially when they plan to vote for right-wing parties. Or it could be that the pollsters are asking the wrong questions, or not counting the people who will actually turn up to vote. We will see perhaps some of the enquiries will turn up some answers.
How do you prepare for the worst?
But whatever the answer, it is increasingly clear that something has gone wrong withpolling. That poses a challenge to political campaigners. But it is also a challenge for investors. Why? Because if we can't rely on polls any more, the results of every election will be a lot more unpredictable. In turn, that means more surprises and more market volatility. So long as the polls were roughly right, you could position your portfolio accurately ahead of time which was one reason why investment banks traditionally paid handsomely for their own polls.
To take the UK example, you may not have liked the prospect of a Labour government, but you could tell some way in advance that it was coming, and sell off your British shares in plenty of time. The result? Even if something was bad news for the markets, it was already in the price.
Surprises are rarely good
But if the polls keep getting elections wrong, that will no longer be possible. Sometimes, of course, that will be for the better. The British election was a pleasant surprise for the markets. Instead of a hung parliament, or a left-wing Labour/Scottish National Party coalition, investors woke up to a pro-business Tory majority, and the FTSE rallied as a result. The Israeli elections came in the same category. Sometimes, by contrast, the "surprise" will be for the worse. The Polish elections were a nasty shock one of Europe's most promising economies had elected a populist eurosceptic, which, unsurprisingly, rattled the markets.Either way, however, no one could position themselves ahead of the election.
Don't expect things to improve
The chances are it will get worse.I wouldn't be at all surprised if the polls get the upcoming referendum on British membership of the European Union wrong (the "outs" may well prove even more shy than Tory voters, which will make it very hard to count them).
Likewise, they may well have trouble getting the next French Presidential election right the National Front candidate Marine Le Pen may well get a lot more votes than the polls say she will, even if it is not enough for her to win. As for the upcoming Spanish election, which could see the Syriza-style Podemos party sweep to power on an anti-austerity ticket, it is anyone's guess what will happen but if Podemos does take power, as Syriza did in Greece, that will come as a big shock to the markets.
So what should investors do? Perhaps the only smart response is to look at the political trends and form your own judgement. Looking back, it seems obvious that the Tories would do well in 2015 they were running on the back of a successful economic record, given where they started from, and against a very left-wing opposition. The polls should have been ignored.
Going forward, the same logic tells you Podemos probably won't do very well in Spain, whatever the polls say the economy is growing again, and the example of Greece is scary. The National Front will probably do better in France than anyone expects because the economy is still in a terrible state, and the French know they are getting poorer.
But Hillary Clinton will probably do worse in the 2016 US presidential election than forecast too old, too left-wing, and too much of a Washington insider. But that is really just guesswork. Even so, with the polls now completely inaccurate, that may well be all we have to go on.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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