UK Election: Why you should forget politics and ‘vote value’



Ian Kelly
Fund Manager, Equity Value

Future returns from the UK stockmarket will depend far more on current valuations than the identity of whomever voters elect to run the country

A general election campaign that began as a presumed coronation is drawing to a close apparently rather more evenly balanced. One consequence of this is market commentators have felt able to speculate on what the different potential outcomes – a Conservative majority, a hung Parliament or an outright Labour victory – could mean for investors.

Here on The Value Perspective, we understand that politics can be an important consideration for many investors. After all, the political instability in countries in, say, Africa and South America, can be disconcerting – especially when they lead to industrial unrest, strikes in key sectors such as power, the imposition of emergency measures and so on.

The UK has experienced political instability before

Obviously that would be the sort of political environment few would wish to commit money in – and yet it is precisely the one the UK experienced back in 1974. That year, industrial action by the coal miners led to serious concerns about the sustainability of the country’s electricity supply and the imposition of the Three-Day Week – followed by not one but two general elections.

Plenty of commentators think that one of the potential victors in today’s election will bring left-wing uncertainty, which would be bad news for investment. If you share this view, then consider that many people have speculated that Britain actually faced the threat of a military coup in the mid-seventies, with tanks stationed at Heathrow Airport in January 1974.

And yet 1974 was also the year the UK stockmarket embarked on a bull run that continued pretty much unbroken until the so-called ‘Black Monday’ crash in 1987. Yes, it would have been an uncomfortable and deeply contrarian thing to do but, if you had invested £100 in the UK market the day after Harold Wilson was confirmed as prime minister on 11 October 1974 it would have grown to £457 over five years and £1285 over 10.

Valuation matters most

One thing that should have helped settle an investor’s nerves that morning in 1974, however, would have been the low valuation of the UK market, which was trading on a cyclically-adjusted price/earnings ratio (CAPE) of just 4.6x, compared with a long-term average of 15.1x. And as we never tire of saying, here on The Value Perspective, it is what you pay – not the growth you receive – that is the biggest driver of future returns.

So, yes, politics is important – but much more with regard to investor sentiment and the flow of news than actual long-term investment returns. In that context – and no matter who we awake to as prime minister on Friday morning – valuation matters most.


Ian Kelly
Fund Manager, Equity Value


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