The General Election - Intelligent investing in a climate of unknowns

“In today’s uncertain economy, the safest solution to be wealthy, be in total control and enjoy freedom for you and your family is to have multiple streams of income.” — Robert G. Allen

The age of uncertainty. The pre-Christmas treat of a general election that the UK’s been gifted is just one of many uncertainties blending with the seasonal festive fever this winter. Trade wars, Brexit, the rise of extreme politics and the binary attitudes shaping the social and economic landscape more generally, all make for a toxic cocktail, making economic predictions and financial planning a veritable Nightmare Before Christmas.

As much as the Conservatives versus Labour narrative is monopolising the media and mental energy, the global trade wars are equally relevant to those considering their investments and financial wellbeing. If you live in France today and produce cheese you won’t be happy with Mr Trump; if you live in Hong Kong you won’t be happy with Mr Xi. To say we are living in a time of seismic change is something of an understatement.

As for the political narrative, currently, the most likely outcome, according to the bookmakers and the polls, is a Conservative majority. This would allow Boris Johnson to push through his current withdrawal deal, perhaps as early as the 31^st January. However, because Brexit is a complex process that will go on for years it doesn’t mean an end to uncertainty. It also doesn’t eliminate the possibility of an eventual ‘no deal’ Brexit, something many investors fear, if trade negotiations grind to a halt during the ‘transition period’.

It’s therefore hard to say whether a convincing Conservative victory would please the market that much. Ultimately, though, a Tory majority leaves the door open to the possibility of a no deal outcome, which is perceived by the market as damaging.

Meanwhile, a Conservative victory with no majority, or a hung parliament, would probably mean overall parliamentary arithmetic on the issue of Brexit doesn’t change much. This would reduce the chances of a no deal but would probably mean a continuation of the impasse in the House of Commons – and even more uncertainty. Everything will move back to the drawing board, and markets will probably not like this outcome much unless it leads to a second referendum and a potential route out of Brexit altogether.

As trusted advisers and caretakers of your assets and investments, we will always look beyond the rhetoric and take a holistic view of the climate in which we’re operating. To this end, rather than look at the short-term impact that either outcome may have on personal finances on December 13^th, we’ve taken a broader look at the picture globally.

A cause-driven and disenchanted public

On 28^th November, the IFS criticised both the main parties plans for spending as not being ‘credible’ stating that the Conservatives would be likely to end up spending more than their manifesto pledges suggest. At the same time, they also pointed out that Labour’s plans would mean it is ‘highly likely’ that taxes will rise further than suggested in their manifesto.

Whilst future gazing means taking the economic situation on trust, and assumes that the UK can continue to grow its National Income. Low levels of productivity growth in the UK since the financial crisis has meant that many voters now have lower living standards than they would have had if that event had not occurred (source: IFS). Most of the growth has been in financial assets due to ultra-low interest rates and that has disenfranchised many voters of all parties: this could come back to haunt whoever is in number 10 on 13^th December – one only needs to consider the Extinction Rebellion or Gilets Jaune protests to understand the feeling of discontent among the general public.

Along with the Liberals and Greens, the main parties have committed to a series of increases in public spending encompassing a range of things including the NHS and zero-carbon targets. From a financial planning and investment perspective, there is merit in investing in some of the companies likely to benefit from this. Strategies that invest in companies (or potentially avoid others) that have stronger governance and better environmental or social impact have proven that they can add more value than ‘old world’ industries and, with the latest generation of voters more likely to find appeal in ‘impact’ investing, there is good reason to look more closely at businesses at the forefront of areas such as biotechnology where such ‘impact’ is easier to see.

Second-guessing a notoriously fickle market

From a government debt point of view, some of the manifesto pledges continue to be open ended. Labour plans on nationalisation are a case in point and it seems that some of the ideas are just so immense that pushing them further into the future is an easier option. For example, adult social care, pension funding and the triple lock provision on the state pension scheme involve many moving parts. In financial planning terms, this looks like failing to plan, and whilst private individuals can plan to do so the costs (without any government help) can often be beyond them and insurance cover can be very expensive. Saving for the future remains a very positive thing, but the higher the demands of saving for later life, the lower the amount of money entering the economy to be spent – it is an eternal dilemma.

If any of this is to be funded by the state,  then this could have a knock on impact to gilts and corporate bonds more generally; in an era of low interest rates, any increase in the cost of borrowing would be felt immediately and would likely lead to more volatility in fixed interest securities that are priced off the cost of government debt.

In any event, the election may not be the decisive moment some expect it to be from an investment perspective. There is every chance that the markets will decide that any result is not that effectual and push down sterling leading to higher borrowing costs and UK domestic investments under further pressure. The chances of leaving by December 2020 with ‘no deal’ could do more damage to sterling and gilts than expected – this would put any future Prime Minister in an awkward position about borrowing on the cheap to fund fiscal spending plans on areas like national infrastructure, the NHS or a multitude of other commitments made in the respective manifestos.

We would recommend that investors do not choose to second guess the result and subsequent market movements as it may lead to a negative outcome. Investing for the right reasons and based on an assessment of the risks you can afford to take, is generally a much sounder approach. Remaining diversified and owning some assets in your home market will give you the chance to participate in any market changes that come from the election result. If you’re looking for certainty and guarantees, betting on the probability of a white Christmas could be far safer than any high-risk strategy in these times.