How can politics impact your investments?

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It has been impossible to miss the political entanglements over recent times between the UK and the US. We have seen political unrest between parties, national and international contention, US election fraud claims, the attempted assassination and subsequent re-election of Donald Trump, and now tariffs imposed by the new President.

In recent years, market confidence has been shaken by many factors. Uncertainty seemed to be concentrated during Brexit negotiations, during which there was a change of leadership. Implosion within the UK parties during the Covid-19 pandemic, followed by conflicts in Ukraine and the Middle East has created a volatile environment for investors. This had led to fluctuations in the British pound and stock market instability.

While this may be interesting reading, you might wonder what effect politics might have on your investments. I think it’s safe to say that most political events have the potential to have a significant influence on market performance, investor confidence, and economic stability, whether that be a negligible ripple, short-term volatility or a longer-term decline in value.

3 ways markets may react to political uncertainty

1. Immediate reactions

Markets have reacted quickly to ‘Liberation Day’ on 2^nd April when Trump imposed a sweeping minimum 10% tariff on almost all imports into the US. Proposed tariffs are much higher for Asia, more specifically, China, where at the time of writing, these currently sit at 145%. Trump has cited the reason for doing this is to reduce the US trade deficit. He believes trade is being unfairly lost to overseas competitors, and that there is a long-term benefit to bringing production back to the US. The President has made it clear that any perceived retaliation – as is the case with China - will lead to higher tariffs for said threatening countries. The UK is one of the countries subject to 10%, thus far. The immediate reaction has been unsurprisingly negative, with the most likely consequences being higher inflation and lower economic growth, leading to a downward turn in the equity market. However, it is not all negative, the tariffs imposed could lead to a restructure in the global economy and a new economic order, which could in turn lead to significant investment opportunities for the UK, Europe and Asia. The ‘re-shoring trend’ may accelerate manufacturing companies to produce more in their own countries, which could increase the global trade deficit.

2. Long-term effects

Long-term impact depends on the nature of the event and the implications. An example of this is the record-high inflation rates starting in 2022, when the Consumer Price Index (CPI) reached its highest levels since 1981, peaking at around 11%. This, together with global unrest, a drop in the performance of the bond market, and Kwasi Kwarteng’s 2022 mini budget, led to a downward trend in the markets.

3. Investor sentiment

Political stability can have a varying impact on investor confidence. Positive news such as favourable trade agreements can boost market sentiment, while negative news, like political unrest, can lead to market downturns. The 2023 Spring Budget, put in place by former Prime Minister Rishi Sunak and former Chancellor Jeremy Hunt, led to the beginning of political stability, and the investment markets started to improve.

Political change

Election cycles are another aspect of politics that can influence the investment market. They often bring uncertainty, and speculation about potential policy changes and their subsequent implications can lead to volatility.

In the UK we have seen Labour take charge for the first time in 14 years. At first, the population seemed to welcome the change, but it did not take long for the new Government to begin to face a backlash, with negative sentiment swiftly setting in following headlines of Sir Kier Starmer accepting gifts, a U-turn in his support for the Women Against State Pension Inequality, and the withdrawal of Winter Fuel Payments for pensioners. Chancellor Rachel Reeves’ announcement of a ‘black hole’ in the country’s finances and steps to mitigate this with substantial employer tax increases have led to a drop in business confidence. Even with the announcement to cut spending and reduce the ‘black hole’, UK borrowing for the 12-months to December 2024 was the second-highest since monthly records began in January 1993, and there is speculation as to whether the planned spending by the Labour government is affordable or achievable.

Is it possible to mitigate the impact of a volatile market?

As we have seen, politics and the investment markets are heavily interlinked, with political events and decisions shaping the dynamics of the investment markets over both the long and short term. Economic policies, political stability, and election cycles all play crucial roles in influencing both investor behaviour and market performance.

At Armstrong Watson, we believe in the philosophy of ‘time in, not timing’. This approach, along with sound financial advice, should help to mitigate any long-term effects of market volatility. Receiving financial advice for your goals is imperative in guiding you towards a successful outcome.