What could the general election mean for UK equities?

General election polls suggest Rishi Sunak should be worried about his future. But do you need to worry about your portfolio?

View of the Houses of Parliament, London, UK.
(Image credit: Getty Images)

The 4 July general election is just around the corner and promises to spice things up as we head into the summer.

As polling day approaches, you are probably already being bombarded by politics at every turn – from social media to the newspapers. But will it rear its ugly head in your portfolio too? This is an important question for many UK equity investors

The asset class has been unloved by investors for many years but has picked up in 2024, with the FTSE 100 soaring to record highs. The question now is: what are its fortunes going forward? 

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So, could the election put the FTSE off its stride? Would a Labour or a Conservative government be better for investment markets? And does politics even have that much of an impact on equity market performance? We’ve looked at some of the key considerations. 

Can politics impact investment markets?

Politics undoubtedly has an impact on financial markets. Three moments in recent history will show you that.

First, consider the Brexit referendum. This is a prime example of where UK voters went to the ballot box and it had a significant (and sustained) impact on markets. UK equities are finally seeing some strength now, but their performance for the past eight years has been decidedly limp.

Secondly, look at Liz Truss’s disastrous mini-Budget in September 2022. A string of unfunded tax cuts caused the cost of UK borrowing to soar. The fiscal event also fuelled inflation and pushed mortgage rates up – the effects of which we are still feeling today. 

Finally, while it is in no way comparable to a UK general election or fiscal event, consider Vladimir Putin’s decision to invade Ukraine. 

Describing this as a political move understates the devastation it has caused at both a human and economic level. Nevertheless, it is an extreme example of how geopolitics can impact markets.

Europe’s overreliance on Russian gas caused an energy shock, which pushed up global inflation. In turn, this higher inflation prompted interest rate hikes from the major central banks. And rising interest rates caused all major asset classes to suffer losses in 2022. 

In other words, politics, economics and markets are closely intertwined. But where do general elections sit in all this? And should you be worried as the 4 July polling day approaches?

What impact can general elections have on UK equities?

Of course, none of the events described previously is directly comparable to a general election. Each could reasonably be described as a black swan event. Meanwhile, general elections are far more quotidian. They happen at least once every five years.

Nevertheless, research from AJ Bell suggests elections do have a market impact beyond the immediate ripples that surround polling day. The good news is that this impact is generally positive, according to the investment platform. 

Investment director Russ Mould says: “A study of all sixteen of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is by no means frightened of a change in government and it may even welcome it."

“On average, the FTSE All-Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another, new one ushered into it.”

He adds: “There are also greater average gains when a government changes relative to when it remains the same.” This could be good news for investors, given the polls suggest 10 Downing Street will have a new occupant come 5 July.

Swipe to scroll horizontally
Header Cell - Column 0 Capital return from FTSE All-Share one year before pollCapital return from FTSE All-Share one year after pollCapital return from FTSE All-Share over full term of government*
Change in government6.0%12.8%47.9%
Incumbent wins11.8%0.9%31.1%

Source: AJ Bell and LSEG Datastream data. *1964/66 to 1970 Wilson governments and 1974/74 to 1979 Wilson/Callaghan governments counted as one term. 2019 Conservative government to 22 May 2024. 

Of course, in reality, it is not quite as straightforward as all that. When assessing the source of market returns, it is nearly impossible to distil political factors from other market drivers. 

John Stepek, MoneyWeek’s former executive editor, makes this very point in a recent edition of Bloomberg’s “Money Distilled”. He highlights some of the analysis that has been doing the rounds since the election was called. This looks at a range of Labour and Conservative governments throughout history and compares stock market performance throughout their terms.

“The FTSE 100 stuff is fun,” Stepek says, “but it’s not meaningful. You can’t reasonably compare the 1970s to the 1990s [...] and pretend that the critical variable was the political party in power at the time.”

In reality, markets operate in a delicate and complex ecosystem. Performance is dependent on a thousand different variables – from how individual companies are run, to where interest rates are heading, to how fast an economy is growing.

Things like politics and regulation are enormously important, but they don’t drive markets on their own. Investor sentiment is enormously important too. And while politics can both spook investors and boost their confidence, sentiment is notoriously difficult to predict.

Stepek points to comments made by economist Paul Krugman in the aftermath of the 2016 US election to make this very point. He says: “Krugman infamously told the New York Times on the day of the election that markets would ‘never’ recover and predicted an endless global ‘recession’. But within hours he’d been proved wrong, as prices flipped around and surged to new highs.”

The old adage about expecting the unexpected is generally good advice. In situations like this, diversification is an investor’s best friend.

How should I prepare my portfolio for the general election?

If what we have said previously is true, what is the logical conclusion? Should you sit pretty and do nothing every time voters head to the polls?

In short, probably not. Not all elections or political moves are equal. Markets like stability and, as we saw with Liz Truss, sudden U-turns on taxation and spending can cause big problems.

However, the good news heading into this election is that neither major party appears to have any big surprises up its sleeve. Both the Conservatives and Labour have said they are committed to maintaining economic stability. Both parties want inflation to continue to slow, and interest rates to start to come down.

What’s more, both know they will need to keep a lid on spending and adopt a sustainable approach to taxation if they are to achieve this. But that isn’t to say there hasn’t been a healthy degree of mudslinging.

Sunak has said that Labour has “no plan”, while casting the Conservatives as the party that will usher in lower interest rates (despite the fact that it is the Bank of England that makes monetary policy decisions). Meanwhile, Labour has said that the Conservatives’ plans on things like the triple lock plus pledge are “unfunded” and could result in further rate hikes down the line.

However, on key issues like income tax, both parties have committed to freezing thresholds until 2028. There is no desire among the Conservatives to repeat the mistakes of the past in an attempt to win votes. Likewise, while critics have often cast Labour as an anti-business party, shadow chancellor Rachel Reeves has been at pains to shake this image going forward.

“The prospect of a government spearheaded by Sir Keir and Rachel Reeves is unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell,” says Mould. In fact, Reeves wants Labour to be known as the “party of growth” and the “natural partner of business”

In short, after a rocky few years, both parties appear to be charting a similar path in their commitment to financial stability. So while the election will undoubtedly cause short-term ripples, investors will be hoping to escape any long-term disruption.

Finally, while the election can feel all-consuming, there are other equally important factors you should be keeping an eye on at the moment when managing your portfolio. For example, the timing of interest rate cuts is likely to have even more of an impact on stock market performance.

Very few people spend as much time analysing the make-up of the Monetary Policy Committee (MPC) as they do the House of Commons, but arguably the MPC has far more of an impact on the performance of our portfolios.

With UK equity markets exposed to a broad range of global factors, the decisions of other central banks such as the Fed will have an important bearing too. In short, as well as keeping a close eye on domestic politics, investors should broaden their gaze to ensure they’re seeing the full picture.

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.

Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.

Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.

Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.