So It’s Election Time!

So It’s Election Time!

Whatever your politics, you would have to agree that it has been one of the most exciting and intriguing campaigns of recent times. You will be glad to know I am not going to make any predictions as to the outcome (principally because it is so wide open).

It would be extremely difficult at this stage to start looking at policies and the effects of manifesto plans as the most likely outcome is some kind of coalition/agreement between multiple parties, so concessions will have to be made.

What we can do is look at what affect the election process may have on your investment portfolios.

I asked Will Edge, Consulting Director at Russell Investments, one of our investment partners, for his view:

‘There has been much said about the uncertain outcome of the upcoming election. Between now and the end of May, the volume of noise is only going to increase. A wide array of potential outcomes seem perfectly possible. A majority government, multiple coalition variants, minority government, or even a re-election are all in play.

Taking a directional view on the outcome of the election is at best difficult and seems likely to hinge as much on luck as good judgement. There is a lot more water to flow under the bridge before the election and the minor parties will have a significant role. Even if we did have conviction in a particular political outcome, it is even harder to translate that into short or medium term market effects.

Our preference is to ensure that your clients’ portfolios remain invested in a manner that does not expose them to unnecessary and unrewarded risk. This sentiment is key to how we are approaching the UK General Election.

The one thing we can be reasonably sure of is that the volatility in domestic markets and sterling will increase as a result of the election uncertainty. This increase in volatility is already beginning to manifest itself in option-implied volatility across asset classes.

From our vantage point, it is not clear that the market is pricing in the full extent of the uncertainty or a long enough window. It seems likely that volatility, particularly in sterling, could be more pronounced and last for a longer period of time after the election date.

The stage is set and the actors are warming their voices but the script of this election is far from written. While it would be foolish to try to make predictions about the outcome of the 2015 election, that doesn’t mean we can ignore it either. In the management of our client portfolios towards their balance sheet objectives, there are two things we are doing.

Firstly, we are watching the volatility markets. It is here that we can begin to see how different asset classes are pricing the election uncertainty. By comparing implied volatility domestic asset classes with international markets, we can see if any domestic markets are decoupling from the international pack.

Secondly, we are limiting the exposure to the directional outcome of the election. With no clear outcome and further uncertainty about how markets might respond, there are better risk adjusted returns available. In time, the uncertainty of the election may impact asset prices (and most likely sterling) to offer attractive opportunities. Until then, we’ll watch’ the play begin to unfold.’

So there you go. The one thing we can be almost certain of is some volatility in the markets as they price in the likely scenarios in the weeks following the vote.

I wouldn’t anticipate this affecting our client’s medium to long-term goals and it is our job- make sure everyone stays the course.

I for one am planning for a late night on Thursday into Friday to watch as the results come in, so I may try and get Engage out a wee bit earlier next week.

As I always I appreciate any feedback you wish to give here on our website.

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