By Colin McLean

In a year of elections around the world, how should investors react? The results are known in some major economies such as India, but crucially the UK and USA lie ahead.

It is helpful to look at past experience – stock markets and professional investors often get politics wrong. The surprises are not just in the outcomes of elections but what a result will come to mean over time for economic growth, company performance and share prices. Portfolio performance can easily be lost by trading on politics.

In India, the stock market moved strongly ahead of its election anticipating a continuation of Premier Modi’s substantial majority. His two terms in office had almost tripled India’s stock market value, taking share prices on average to ratings even more expensive the average of US shares.

The unexpected result - a coalition - triggered the biggest fall in Indian share prices for four years. It highlights the dangers of dealing in investments around election times and also in pinning too much long term hope on a particular individual and mandate.

Yet it is too early to say whether the result should be seen as a disappointment for investors - the share price volatility looks emotional rather than calculated. The UK stock market similarly struggled to assess the Brexit vote, initially falling sharply.

The US presidential election in November is a worry for many investors, bringing polarised politics to a stock market that represents over 60% by value of many global indices. Predicting the result is almost impossible – it is hard to factor-in the possibility that a candidate could stand down or something unexpected emerge – and it makes little sense for long term investors to let polls drive their portfolios.

The US stock market rose over 50% in four years of Trump, followed by a similar gain under Biden’s term. Elections bring conflict and often divisive rhetoric, but the differences can be exaggerated: running a government involves a high degree of consensus. Even in the US, checks and balances often require coalition for contentious programmes. The theatre of electioneering makes for interesting media coverage and is a key part of democracy, but investment is best done unemotionally and focused on numbers.

Private investors in the UK typically have some international investments but are more concerned with what might happen to shares in London. Looking at the history of stock market reaction to surprise results, coalitions and changes of government there is little sign that those events significantly changed the course of the economy or share prices over the medium to longer term.

Quite apart from the cost of dealing there is a risk that money sitting in cash ‘for safety’ might miss out on positive surprises, sudden jumps in share prices. Investment returns are often lumpy rather than spread evenly over time. Professional investors usually know better than to try to time their investment – making short term bets on stock market direction.

UK general elections involve a lot of debate about what parties would like to see happen, but the constraints in terms of the government financial position take a back seat. Economics and company news get less attention, as the front pages are filled with politicians and pundits.

Even announcements that might be made in the ordinary course of business, such as interest rate changes and new contacts or economic stimulus are held back. The effect is imbalanced coverage, as if the election was all that mattered and little else was happening in business.

Investors should be patient and avoid changing strategy. When government is in place and programmes known there will be ample time for assessment. New plans may bring opportunity for particular companies that can assist implementation.

Trading on the basis of headlines, polls and debates is not the way to build long term performance.

Colin McLean is a director of SVM Asset Management Holdings