Anti-Miliband scaremongering ignores the first rule of financial markets

In the volatile world of investment, past performance is no guide to future results


Of all the allies enlisted by those in the press seeking to discredit the Labour party, the volatility of financial markets is the most risible.

MoneyWeek published an ‘Emergency election broadcast earlier this month warning of the seven economic sectors likely to suffer if Miliband gets into Downing Street. In April the Daily Mail ran a story citing research by Hargreaves Lansdown which showed that the stock market ‘performs better with Tories’.

When it comes to interpreting the movements of financial markets, the first rule is that past performance is no guide to future results. The second is that correlation does not imply causation. These commandments are anathema to a press that fills pages by printing stories based on the most insubstantial of evidence. Fortunately those whose livelihoods depend on producing accurate, unbiased accounts of market behaviour – such as investment managers – are not impelled by this need.

So what do the professionals say? In Standard Life Investments’ first quarter global outlook, the firm analysed the impact on UK asset prices following the eight elections since 1979. It concluded that:

“There are no simple rules of thumb about the impact of an election or particular party on investment returns, and secondly that the underlying economic and corporate fundamentals are much more important.”

The analysis found that the annual return on equities beat the 13.5 per cent average across the period in the year after an election in five cases: two Conservative, two Labour, and one hung parliament. Bonds beat the average 10.4 per cent in three cases: two Conservative and one Labour.

The choice to use data points a year on from an election is important. This strips out the noise of short-term volatility immediately before and after polling day, which is driven by the actions of opportunistic, short-term investors rather than long-term institutional players.

Indeed, markets generally price in the impact of ‘known unknowns’ – such as election results – well ahead of the event. This is reflected in Standard and Poors’ Dow Jones Indices index dashboard, issued in April, which attributed the 3.5 per cent surge in the S&P United Kingdom index to the fact the market has already factored in the likelihood of a hung parliament.

Real chaos hits following ‘unknown unknowns’, like the unpegging of the Swiss franc from the euro in January, which saw the latter plunge 40 per cent against the former in the space of 30 minutes following the announcement by the Swiss National Bank (, £).

Turning to the present election, one bond trader says the volatility currently observed in UK gilts pales in comparison with that experienced in European bond markets:

“Yields have been rising in the last couple of weeks but during this time we have seen enormous volatility in European sovereigns. This really muddies the water when looking for correlation and causality vis a vis the election.”

If this wasn’t enough to make you sceptical of the supposed signals broadcast by financial markets in the days immediately leading up to and following an election, keep this in mind: the leading equity index in the UK – the FTSE 100 – is not really a UK index at all. The 100 listed companies in this index derive 75 per cent of their revenues from outside the UK, meaning that ex-country factors dominate performance far more than domestic political turmoil.

Keep that in mind if you see headlines on Friday following a Labour victory screaming: ‘British businesses reject Miliband’.

‘Louie Woodall is a financial journalist and Young Fabians Executive Committee member. Follow him on Twitter

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