What impact could a General Election have on the markets and your investments?

Voters head to the polls on 4 July for the UK’s first general election in four and a half years. Individual policies aside, how can a General Election impact your own personal investments?

Election fever is hotting up as voters prepare to head to the polls to decide who will form the next UK government and introduce policies impacting everything from healthcare to housing, education to environment, home and foreign affairs, and perhaps most crucially, the economy.

The often divisive nature of political campaigning and hyperbolic media reporting can create the impression that a general election will have a significant impact on the economy and, especially, your personal savings and investments. But does this sentiment actually carry any substance?

With policies still being revealed at the time of writing, this article doesn’t speculate on the likely impact on markets if either main party wins, but rather looks at the historical effect of general elections on markets in general. Remember, investing is for the long term and past performance is not an indicator of future results. If you are unsure of any investment, ask for financial advice.

How have markets performed in past elections?

The impact of general elections on financial markets is not easy to ascertain, however researchers have sought to draw correlations which may or may not be helpful to investors.

Analysts from the Royal Bank of Canada looked at the overall performance of the FTSE 250 and the FTSE 100 three to six months before the last eight general elections cycles in the UK, as well as the impact on markets between one week and one month after each of the votes.

The research demonstrated that the FTSE 250 has generally performed better than normal in the lead up to seven of the last eight general elections in the UK, with average returns during the six-month period ahead of the last four general election cycles hitting double figures (11%).

The performance of the FTSE 250 generally dips in the one-month period before a general election, according to the analysis, but then tends to recover in the month following the general election. The higher domestic focus of the FTSE 250 could explain these correlations, whereas the historical impacts of elections on the more globally focused FTSE 100 index is more varied.

For instance, FTSE 100 performance has only risen in the six months prior to five of the last eight general election cycles, though like the FTSE 250 index it does tend to rise in the initial period after a UK general election. Markets are known to favour certainty which could explain this correlation, as the result of a general election brings clarity to who will govern the country.

Longer-term impact

That’s not to say markets are adverse to change. An AJ Bell study of all 16 general elections since the inception of the FTSE All-Share in 1962 shows, on average, the UK stock market records a double-digit gain in the first year after an election ushers in a new prime minister.

In fact, the average gains when a government has changed in the last half century have been significantly greater than when the incumbent won the general election. The average capital return from the FTSE All-Share one year after general elections when the incumbent won (since 1962) is just 0.9%, compared with 12.8% when there was a government change, AJ Bell found.

Looking global

2024 is unique in that it will be the biggest election year ever, with elections already having taken place in many countries and voters yet to head to polling stations in the UK, US and France. Over 4 billion people around the world will be eligible to vote for who will lead their respective nations, and the global nature of business today means multiple elections could affect markets.

Certainly in the UK, it will be the general election on homeground as well as the US presidential election which grabs the most attention. Research of UK and US markets by the University of Portsmouth found investors’ uncertainty does tend to increase before elections and decrease afterwards, however this doesn't lead the FTSE and S&P indexes to follow a consistent pattern.

In the UK, for instance, stock market returns have on average been positive during an election month for 67% of the time, versus lower values before and after elections. The US stock market, meanwhile, tends to be lower before elections but then rises during and also after the elections.

Which sectors perform better?

Rather than looking at overall market returns during elections, it is perhaps more intriguing to examine how elections impact specific sectors in the UK economy. The research by Royal Bank of Canada did just that and found that the utilities, real estate and industrial sectors have historically performed strongly after a general election, while the energy sector often suffers.

This correlation could be explained by two policy areas which often feature heavily during general election campaigns: housing (through support for people getting on the property ladder and/or planning reform to encourage more housebuilding) and threats to levy more taxes on energy firms. Once again these areas look set to feature prominently in this year’s election.

What does this mean for investors?

While studies have demonstrated some correlations when analysing the historic impact of elections on markets and investments, the reality is there are countless other variables affecting market performance beyond who happens to be running the government of the day. Politics is important but rarely a standalone factor in materially shifting markets in one direction or another.

Of course there are exceptions, as demonstrated by the Brexit vote in 2016 and, more recently, Liz Truss’s short-lived premiership and calamitous budget in 2022. These events showed there are sometimes instances when politics can majorly affect investors’ confidence. Typically, however, they don’t drive markets on their own, which means the foundational principles of investing, including long-term planning and diversification, remains the best guide to success

If you’d like to discuss the general election and other factors impacting your long-term investments call your adviser or contact our Client Services team, click here to book a free callback.