Calling an election result doesn’t mean you’ll make money

Whenever investors are thinking about an upcoming election and the potential impact on markets, we would always offer a word of warning: don’t base your investment decisions on who you think will win.

This is because, even if you do invest in anticipation of an election result that is subsequently proved correct, there is no guarantee you will perform better than someone who didn’t factor the potential outcome into their thesis, or even someone who called it wrong.

Don’t believe me? Think back to the US presidential election of 2016 when the consensus was that a victory for Donald Trump would have a destabilising impact on markets. In reality, tax cuts and loose fiscal policy sparked an equity rally.

Instead, one of the best ways for investors to approach elections is with a sense of detachment. While volatility usually spikes around the election date, it is rare for the result to change the direction of markets. These tend to be more affected by economic variables such as growth, employment figures, interest rates and currency movements. Politicians generally have limited impact on such factors in the short to medium term, especially where there is an independent central bank.

Is this year different? We don’t think so. It is true that more people will vote in 2024 than in any year in history and heightened political uncertainty means that elections will dominate the headlines. It is also true that the range of outcomes in terms of policy mix are quite extreme in key economies, meaning elections are going to have a greater influence than normal.

Yet we would still argue the impact on portfolios is likely to be limited.

The UK election

This is especially true for the UK. Typically, trading volumes are low in the run-up to a highly contested election. This isn’t the case when the result is deemed to be a foregone conclusion, which is likely in the UK given Labour’s seemingly unassailable lead in the polls.

In addition, the result won’t be as pivotal for the economy or the markets as the elections in 2017 or 2019. Whoever wins will be constrained by higher interest rates, which means fiscal policy will be tighter than in the past decade. The Conservatives have destroyed their reputation as good stewards of the economy through the Liz Truss debacle, so a Labour victory is unlikely to be seen as negative in this regard.

To the extent that there are differences, under Labour more of the required tightening in fiscal policy may be achieved by higher taxes rather than lower spending.
Meanwhile, Brexit has cast a shadow over the UK market – on equity valuations, if not on the day-to-day running of most listed businesses. UK co-ordination with the EU appears to be improving across both parties, but particularly Labour, whose leader Keir Starmer has indicated he wants a closer trading relationship with the EU.

The US presidential election

In contrast, the outcome of the US election seems far less certain and with the S&P 500 hitting new highs, some investors are looking uneasily at a shift in direction if Trump regains the presidency.

His protectionist and isolationist agenda poses a threat to the world’s open trading system and European members of NATO which he claims aren’t spending enough on defence. This may embolden Russia’s president Vladimir Putin and the Chinese Communist Party, leading to more geopolitical turmoil and uncertainty.

There is also the potential for turbulence associated with the sustainability of debt-financed growth in general and the US fiscal deficit in particular.
From an inflationary perspective, under another Democratic government, I'd expect more social spending and an extension to expiring tax cuts to be offset with some tax increases. In the context of a $28 trillion economy, the impact on inflation would likely be small.

Under the Republicans, we'd see lower taxes without new revenues, thus a bigger increase in the deficit. This would lead to higher growth and inflation, but the impact would be lagged and would be met with more restrictive monetary policy from the Federal Reserve.

However, while Trump and Biden have drastically different policies in most key areas, each candidate’s ability to enact their plans will depend on whether they have a House majority. This means any impact is more likely to be felt at the sector level.

A ‘clean sweep’ by Trump and the Republicans, for example, will likely benefit many of today’s more heavily regulated sectors, such as finance, healthcare and fossil fuels. Alternatively, beneficiaries of a ‘clean sweep’ by Biden and the Democrats would include alternative energy and infrastructure.

The outcome that poses the greatest threat to markets is probably a contested election. Should a divided government in 2025 lead to the recurring threat of government shutdowns and a potential default, there would be a complete reappraisal of how domestic and international investors assess US country risk – and even a re-rating.

European Parliament elections

Elections for the European Parliament take place in June. This is important as the organisation has influence over legislation and how the EU’s budget is spent, affecting everything from product standards to broader trade policies.

Polling suggests Eurosceptic parties could make large gains, fundamentally shifting the balance of power.

While the number of parties and blocs in the European Parliament makes it difficult for extreme voices to gain control, recent years have seen the weakening of policy proposals around environmental protections, most notably the EU’s Green Deal. Should the makeup of the parliament shift to the right, it could lead to electric-car deadlines being pushed back, affecting the manufacturing sector.

It is possible that the US election could have more of an impact on the European economy than European ones. Should Biden win, it would be negative for automakers, but bring greater stability in terms of NATO membership. Should Trump win, it would lead to uncertainty about NATO membership, the US’s support for Ukraine and the war on climate change.

Don’t rush into portfolio changes

The only thing that is certain when it comes to elections is the uncertainty. Investors would probably be better off waiting until after the results are in and the incoming politicians have enacted their stated policies before making any changes to their portfolio – if they make any at all, that is.