Can political uncertainty impact your investments?

5 min read 20 Jul 22

Summary: With all the recent political upheaval, we take the view that these event changes are unlikely to have a major impact on your investments in the long run. Read on to find out why.

We’ve had “Partygate”, the vote of confidence, and high-profile government resignations culminating with the Prime Minister himself. After all this drama, saying that the UK has seen a tumultuous political period of late looks like an understatement. 

During turbulent times like this, many in the financial industry are asked, or simply feel the need, to comment on what the outcome means for investors. 

Financial markets have certainly been volatile in recent weeks, with the twists and turns of the UK’s own political saga superimposed on the gloomy outlook for the global economy. On 5 July, the FTSE 100 Index of the largest UK-listed companies dropped by almost 3% when pressure was building on the Prime Minister to resign. That said, after the 5 July dip, the index had risen again by almost 2.5% on 8 July, despite Boris Johnson’s resignation announcement and resignations from top politicians. But please remember that past performance is not a guide to future performance.

The performance of a country’s currency is another way of assessing investors’ confidence. Interestingly, the British pound rose in value on the news of Johnson’s resignation, as business chiefs called for tax cuts to boost the flagging UK economy. But despite the rises seen in the FTSE 100 Index and sterling, uncertainty remains high due to a series of economic problems – soaring energy prices, high inflation and rising interest rates. They all threaten to send the UK into a recession, straining household finances and leading to an increase in government borrowing. 

Taking the long view

Political upheaval usually causes short-term nervousness. However, despite the lack of clarity at the moment, these changes are unlikely to have a major impact on the economy and stockmarkets in the long run, in our view. 

What we do know is that markets have historically shown long-term resilience when it comes to coping with extreme events. Earlier this year, we saw how investors’ initial reaction to Russia’s invasion of Ukraine was one of panic. Following the start of the war, the FTSE 100 Index and global stockmarkets (as measured by the MSCI All Country World Index, an index of the shares of companies around the world) both fell sharply, before recovering fairly swiftly. More of that article can be read here

As uncomfortable as times may feel when the news is bleak, it is important to not get too alarmed. Historical patterns show that political uncertainty has often proved temporary, with only minimal long-term impact on asset prices, if any.

One of the main reasons for this is that a change of political leader is not likely to lead to fundamentally different economic policies. Although the new prime minister may have different spending priorities and favour lower taxes, it is unlikely that there is going to be a radical shift in the UK economy. Once the initial shock has passed, this is likely to be reassuring for investors.  

Staying focused 

Past patterns have shown that global stockmarkets typically recover from shocks. Within stockmarkets, well-run companies tend to be more able to cope with unpredictable events. Generally, they are resilient due to their strong corporate governance, which focuses on robust checks and balances between various stakeholders, and a business strategy that puts long-term growth above short-term profit. Therefore, it’s important for long-term investors to stay focused on those factors and ignore the political drama.

Of course, the reality is that politics cannot be ignored completely and there’s always interest in day-to-day activities. Political decisions will have a direct bearing on the pounds in our pockets, be it via taxes, or via policies to curb inflation or tackle fuel prices. 

Despite the many moments of noise, hysteria and panic in the stockmarkets, ultimately corporate results drive long-term share price performance. M&G’s fund managers remain resolutely focused on their longer-term objectives and will seek to cut through the market noise. We would argue that the fate of our Prime Minister and political fortunes in general will not have a long-term impact on performance. 

Politicians and Prime Ministers will come and go, but companies will (hopefully) be around in generations’ time, seeing through several shifts and unsettled periods of politics. By avoiding the distractions and bearing down on what really matters, our fund managers think taking the long view and picking well-run profitable companies is the way to generate attractive investment returns.

Please bear in mind that M&G Investments are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.

The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

By M&G Investments

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