How will the UK election affect your portfolio?

Indeed, this outcome was precisely what happened—with the final tally of 412 seats for Labour (including the seat of the independent speaker) meaning they won by a landslide and now take a huge majority through to the next general election, effectively meaning they can govern as they see fit. However, as is natural, a big question no doubt looming at the forefront of investors’ minds is how a Labour win will affect their portfolios.

The first point to make would be to remember that the LIFT-Invest portfolios are diversified by both region and asset class. Our Moderate portfolios, for example, currently contain a 32% allocation to fixed income and a 68% allocation to equities, with 6% allocated to UK equities. Clearly, any potentially negative impact of the election would be reasonably well insulated. In fixed income, whereas the majority of the allocation is to UK assets (government and corporate bonds), the dynamics are a little different – governed to a greater degree by the actions and rhetoric of the Bank of England (and the US Federal Reserve), and only a collapse in investor confidence in the ability of the government to be fiscally responsible would have a notable impact.

Historically speaking, data gathered by investment platform AJ Bell indicates that when there is a change in government, one year before polling day, the FTSE all-share has gained +6.0% and +12.8% in the year after. Conversely, when the incumbent wins, there is an +11.8% gain in the year before and just a +0.9% gain in the year after. Over the whole term of government, when a new party is elected, the index has gained +47.9%, though when an incumbent wins – this falls to +31.1%. These occurrences speak to markets being wary in the run-up to a change in government, with less certainty about how they may perform – but conversely becoming more excited by a change in personnel and an influx of fresh ideas, indicated by strong performance after the election and over the term of government.

Over the decades, there has undoubtedly been a belief that the Conservatives are better for stock market returns than Labour. However, the data and the underlying evidence for that are a little more complicated.

Looking at the above chart, the Conservative government’s impressive periods (1951-1964, 1979-1997) and Labour’s disappointing ones (1929-1931, 1997-2010) were arguably influenced more by global events than individual policies. Post-WWII rebuilding led to solid growth in the 1950s and 60s, and the 70s saw macroeconomic volatility due to soaring commodity prices, high unemployment, tensions in the Middle East, and the collapse of the Bretton Woods system of fixing exchange rates. Two strong decades followed this as the energy supply stabilised and stagflation was banished. Conservative policies of privatisation and tax cuts no doubt contributed to this, but the party also benefited from powerful global tailwinds.

The 1929-1931 Labour government had to contend with the Wall Street Crash and the onset of the Great Depression — factors well beyond their control. Similarly, the Blair/Brown government of the 2000s initially saw the bursting of the dot-com bubble and the Global Financial Crisis in 2008— again, both of which would have occurred entirely independently of which party was in government.

Some of the belief that Labour are bad for stock markets has almost certainly been driven by the fear around more radical left-wing leaders such as Michael Foot in 1983 and Jeremy Corbyn in 2017 & 2019. Of course, neither leader formed a government, so the actual effects on the market are difficult to ascertain. Analysing the rhetoric and policies of the Starmer-led Labour, they are now much more towards the centre and akin to Blair/Brown’s New Labour than the unashamedly socialist Corbyn. This ideological approach is considered more stock market friendly and less likely to alarm investors.

Finally, it is worth commenting on currency moves. Should Labour’s actions in power serve to depreciate Pound Sterling (especially against both the Euro and the US Dollar) – then what would that do to investors’ returns? Reassuringly, this eventuality may not necessarily be a bad thing. The FTSE 100 has an inverse relationship to our currency, with the majority of the index comprising large, multinational companies that earn revenues in a variety of foreign currencies. As they would then report revenues and profits in a weaker Sterling, this would enhance profits – subsequently boosting share prices. Also, as portfolios are internationally diversified, European and US assets would see their value increase for a Sterling investor. Whereas dramatic falls in currency are not particularly healthy over the long term – there are benefits to bear in mind rather than it being a universally negative phenomenon.