How does the FTSE 100 perform before elections?

Data shows that markets tend to rise in the lead-up to elections when there is a degree of confidence about who the likely winner will be.

05-02-2017
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Authors

Ben Arnold
Investment Director

Clear-cut general election campaigns tend to have a positive effect on the stock market, history suggests.

Our analysis looked at the final six weeks of the last seven elections and found the FTSE 100 rose on three occasions, each time when the result was regarded as fairly certain. This included Labour’s wins in 1997 and 2001 and a Conservative victory in 1987.

When elections have been a close affair, markets have retreated. The FTSE 100 fell more than 8% in the run-up to the 2010 election when a Coalition government was formed.

Early polling suggests the Conservatives hold a significant lead, with between 42-44% of the votes*. But will markets rally between now and polling day on June 8th?

Prime Minister Theresa May called a snap election, much to the surprise of markets. The pound rose to a six-month high. This led to the FTSE 100 having its biggest fall since the Brexit vote, showing again how influential currency strength is.

The table below shows the six-week price change in the FTSE 100 before every election since 1987, which was the first vote after the “Big Bang” deregulation of financial markets ordered by PM Margaret Thatcher in 1986.

How the FTSE has performed 6-weeks before a UK election

RC61780_FTSE_6_weeks_before_UK_election_web_chart_770px-v2

"It makes sense that markets perform well during times of political stability,” said James Rainbow, Co-Head of UK Intermediary Business at Schroders. “It’s useful to know that this has also applied during the run-up to elections over the past 30 years, although there’s no guarantee that will be the case for this election.

“During those previous periods, investors may have moved money elsewhere, maybe into cash. Bonds, which have lower volatility than equities, can also prove popular at times of uncertainty. But long-term investors in the stockmarket should be well used to the idea that they’ll be periods which are a little rocky, especially around political major events. 

“The best option is to remember your original reasons for investment and stick to the plan.”

Investors looking to speculate on polling results should note previous surprise results. The 2015 election offers a cautionary tale. Polls indicated it would be the closest election in history, and a hung Parliament.

Markets only finished the six-week period slightly down. Polls were proven completely wrong also, with the Conservatives achieving an outright majority.

More than just politics

Important UK data such as CPI (inflation) and PMI (health of the manufacturing sector) are also expected, which will be digested by investors.

The FTSE 100’s constituents are also far more international today than during previous elections.

This means the strength of the pound heavily influences the level of the FTSE, as detailed in our "How currencies move stockmarkets article". It means that a rise in sterling when the election was announced, pushed down the value of the FTSE 100.

*Based on BBC Polls of Polls, 18th April 2017. Polls of Polls is an average of most recent polls from YouGov, Opinium, CornRes and ICM. Based on voting intention for the whole of the UK.

Important Information: The views and opinions contained herein are those of Ben Arnold, Investment Writer, James Rainbow, Head of UK Intermediary Business and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. FTSE: FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

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Authors

Ben Arnold
Investment Director

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