Moderation is key as election uncertainty looms, says George King, managing director and head of portfolio strategy at RBC Wealth Management.

As we come closer to the UK general election on 7 May, wealth managers and investors alike have struggled to predict an outcome with conviction. With the Conservative and Labour party creeping ahead of one other all too regularly in opinion polls, any speculative decisions have been put down to a hunch alone. The author of this article, George King, managing director and head of portfolio strategy at RBC Wealth Management, explores how individuals should react to the uncertainties, if at all. The views of guest contributors aren’t necessarily shared by this publication and readers are invited to respond. They can contact the editor at tom.burroughes@wealthbriefing.com

So much has been written about this historically uncertain election, that it can become difficult to add useful insight on the topic. The national polling data is both inconsistent from one provider to another over the same period, and is in constant flux from one week to the next. Importantly, the electoral system is such that the national maths matter much less than all the headlines would suggest; the election result will come down to the outcome of a relatively small number of contested seats across the country, and few of us have the granularity of data to see or predict what is happening at that local level. 

Our largest concern for months has been the potential for a multi-year period of uncertainty about the UK’s structural relationship with Europe, which has been promised if a Conservative-led government emerges in the days or weeks after polling day. Clearly, the UK will retain important links to Europe, but not knowing which terms may emerge from the process in worse condition than before has real potential to constrict corporate decision making and investment flows into the UK, which could both impact economic growth as well as the financial markets. 

Still, there have also been a series of positions taken by Labour which have the potential to negatively affect a range of industries. Topics ranging from capping energy rates, to raising the minimum wage, to implementing a mansion tax, and eliminating zero-hour contracts are just some of the threatened changes, which have raised concerns among British business leaders. While many of these could be expected to immediately reduce corporate profitability for some sectors, the greater concern is the potential for growth rates to be less robust going forward. 

So, what’s an investor to do? In most of these scenarios, it is the equity markets and the value of the sterling that are most likely to feel the brunt of the investors’ concerns. There is perhaps some ability to speculate at the sector level, for example that some Labour policies might weigh on the energy or real estate industries, or that banks may be particularly sensitive to uncertainties about the nature of the UK/EU relationship and rules going forward. All of the parties are pledging to spend more on the NHS, which could portend positive things for some health care companies.

The first consideration should be whether it is appropriate to alter a portfolio’s composition simply as a result of expectations or fears arising from the impending election’s results. After everything mentioned above, it may seem obvious that an investor should do something, but that isn’t necessarily the case. Take for example someone who has a broadly-diversified portfolio, a long-term horizon, and isn’t drawing from the portfolio for income or to redeploy capital. This could be a person in their 30s or 40s who has set aside some money for a long-term goal such as providing financial support for a child’s first home or even their own retirement. Realistically, they only review their portfolio a few times a year – hopefully with the guidance and perspective of an investment advisor – and the purpose of that is to ensure that there have been no major life changes which might precipitate a need for an alteration of the investment strategy, as well as ensure that the investments in place are still fit for purpose to achieve those goals. For this person, is it really relevant or valuable to consider making portfolio shifts on that basis that something might happen in the electoral outcome which causes some dislocations in one part of the market or another? That would seem hard to justify, and the reality is that this profile probably loosely fits a very large portion of the population.

Still, for those investors who are typically more nimble with their portfolio allocations, there are shorter-term and intermediate-term considerations. In the very short term, we have already started to see markets react to the uncertainties stirred up as campaigning kicked into high gear with some weakness in sterling, and with a spike in expected volatility exactly around the time of the election and the immediate aftermath. While we have been writing and speaking to clients about this for months, anyone looking to act now will find that markets have already started to move. That doesn’t mean that it is entirely too late and there won’t be further movement in both measures, but you are chasing the market to some degree and these expectations have now become quite the consensus view. 

It is in taking an intermediate-term perspective that investors have more scope, but it is inherently also much more speculative. When you actually write it down, there is a dangerously long series of hunches which you have to get right. Could you assume that a Labour-led government is formed and they raise the minimum wage in a way that hurts the profitability of companies with large, low-wage workforces? Sure, but you also have to hope that a strengthening economy and low-cost access to capital don’t offset this effect. Just in that simple example, you have to be right in making three assumptions, with frankly not enough credible information at this point for two of them to be much more than guesses. 

For anyone who has been keenly reviewing all the policy announcements from the various parties as they launched their manifestos, and watching the debates among politicians and pundits alike, one resounding truth seems to increasingly emerge. It is very unlikely that all of the policy announcements that either Labour or the Conservatives have made – let alone all the other smaller parties’ policy positions – will come into force unaltered. This is surely one of the enduring lessons of the current government coalition, and a recurring refrain from both the Conservatives and the Liberal Democrats as they simultaneously take credit for the economy but seek to distance themselves from those parts of the record which are an affront to their respective core voting base.

Ultimately, it is probably best to approach this topic in the same way that one should for any “hunch” that someone wants to express in their portfolio: if you’re going to do anything, do it in moderation. Making extreme portfolio adjustments – presuming that the portfolio is already well-diversified and appropriately structured – simply on the basis of the UK elections is probably not a risk worth taking. If you have a strongly held view that 3D printing or drone technology will be the next big thing, then maybe you would add some to your portfolio, but in moderation. The same applies here, so it may be understandable to want to take a position in dollar/sterling or swap a little banking or energy company exposure for healthcare, but retain enough restraint to only act in moderation. For most investors, just sitting back and watching the drama unfold on the telly should be more than enough excitement.