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How Could a UK General Election Affect The Stock Market?
Ruby Layram
14th May 2024
Updated 27th May 2024
The next UK general election is due to take place on Thursday 4th July 2024.
UK general elections spark a shake-up in government policy which can affect various industries and areas of the economy. But, how could a UK general election affect the stock market?
In this post, we will take a look at what investors can expect from the upcoming elections. We will also share some tips for protecting your portfolio during election season.
- Market volatility in the run-up to the general election
- The FTSE 100 vs FTSE 250 during election season
- Which industries will be impacted by the election the most?
- How to protect your portfolio during a UK election
Market volatility in the run-up to the general election
One of the most noticeable effects that the UK general election could have on the UK stock market is increased volatility during the run-up.
In the run-up to an election, there is heightened uncertainty and speculation about which party will win. This can cause significant market volatility as investors try to speculate which sectors and companies will be positively or negatively impacted by election results.
Volatility can be particularly high when it is unclear which political party will win and this makes it difficult to predict market outcomes.
In other words, there will be a lot of buying and selling as investors try to figure out the best move!
The British Pound
We can’t talk about volatility during a UK election without mentioning the pound!
The sterling is the most receptive market during UK political events which means that an election could cause a lot of movement for the value of the pound. Volatility is typically bad for the British Pound which means that we could see some weakness around the upcoming election.
However, the currency could regain its strength once the polls are in –depending on which party wins!
If the pound does show some weakness, now be might a good time to start investing in Gold – or even Bitcoin!
See: A complete guide to saving and investing in solid gold
The FTSE 100 vs FTSE 250 during election season
The FTSE is a key indicator that can be used to track the performance of the UK stock market. It is clear that the index will experience volatility during election season but, which FTSE fund is the best investment option during these uncertain times?
Well, it turns out that investors might want to turn to the FTSE 250 during the run-up to the political event.
According to research by RBC Capital Markets, the FTSE 250 has shown a positive performance in the run-up to 7 out of 8 past election periods. In fact, during the past 4 elections, the FTSE 250 delivered an average return of 11% in 6 months before the election was held.
However, both funds are susceptible to poor performance in the month after election day which makes them a relatively risky investment.
Remember, past performance does not indicate future results and it is important to do your own research before making any decisions. Just because the FTSE 250 has performed well in the past does not mean that it will do so again!
Which industries will be impacted by the election the most?
It is normal for certain corners of the market to feel the effects of governmental decisions more significantly than others. This is because some industries are more exposed to changing government policies.
Industries that will likely be hit by a UK election include banking, retail, housing, and energy. If you take a look at each party’s missions and manifestos, it is easy to see why!
In particular, the housing market could see a lot of movement around the election. Housing is a key issue in the UK at the moment and is expected to feature prominently in the next general election.
It is hard to say whether these industries will perform positively or negatively around the election. But one thing we do know is that investors should expect to see some movement!
How to protect your portfolio during a UK election
It seems like UK investors can expect to see quite a bit of movement and uncertainty in the next couple of years. With the election set to take place before January 2025, now is a good time to start thinking about how you could protect your portfolio during times of high volatility.
It is difficult to predict exactly what will happen during the election. However, there are several steps that you can take to minimize risk.
Diversification
One of the best ways to minimize the risk of investing is to diversify. We’ve said it before and we will say it again!
Diversification is the process of investing in a variety of different assets, instead of putting all your eggs in one basket. It can minimize risk by ensuring that one underperforming investment does not wipe out your entire portfolio.
During the election, investing in a range of industries could limit the impact or changing government policies. It could also increase your chances of investing in an industry that could perform positively in the aftermath of election day.
Investing in Gold and Bitcoin
One corner of the market that could feel the effects of a UK election is the pound. For this reason, you might want to consider investing in alternative stores of wealth – such as Gold or even Bitcoin!
The former is definitely the more stable option as cryptocurrency comes with its own volatility risk. However, for the sake of diversification investing in both could be an option to consider.
Both Gold and Bitcoin are used as currency around the globe which means that their value isn’t solely tied to the state of the UK economy. Gold, in particular, is seen as a ‘safe haven’ because it can be used to hedge against inflation, has a continuous demand, and has historically been able to sustain value during economic uncertainty.
Although investing in these alternative assets could be a good way to diversify your portfolio, there is no guarantee that your money will be ‘safe’. You should always do your own research and understand the risks involved before investing.
The upcoming UK general election is likely to cause some volatility and uncertainty in the stock market. Investors should prepare for significant movement in the run-up to the election and should keep an eye on industries that are most exposed to government policy.
With the election due to take place by January 2025, now might be a good time to consider adjusting your portfolio to manage potential risks. This could look like diversifying or investing in assets such as Gold or Bitcoin.
One of the best things that you can do during a big political event is to stay informed. Make sure to sign up for our investing newsletter for the latest stock market news and investing tips.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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