Basis Points - A tale of two elections

Investors should be aware of short-term market turbulence that can arise out of global events. The recent elections in the United Kingdom and France are good examples of this, although, there were stark differences between the two. The short-term implications were increased volatility in the respective French and UK markets, however over the longer term and through sound portfolio construction, this should appear as no more than a blip in the general upward trajectory of the markets.

In France, the incumbent President Emmanuel Macron called a snap election following abysmal polls which showed wavering support for his liberal-centrist Renaissance party and growing support for right wing opponents.

Following the gains for the right wing in the polls, French stocks and government debt slid to the downside as investors assessed the outcomes for the market if the right wingers did in fact gain a majority within parliament.

The first round of elections suggested Marine Le Pen’s right-wing National Rally party would inflict a heavy defeat on Macron’s party. The reaction in the French CAC 40 stock index this time was positive, rising 2.7% at the open following the first round, demonstrating rising volatility in the market.

The outcome following the second-round election, however, was entirely different to what polls suggested. The widely assumed rise of the right wing did not come to fruition, and instead, the left-wing New Popular Front went on to win the most seats in parliament. Macron’s centrist bloc also went on to win the second-most seats, while the right-wing National Rally party took the least.

The result of the wild swing between the expected result and the actual result led to increased volatility in the yields on French government bonds, which in turn caused large variations in the directionality of the CAC 40 stock index and further volatility in government bonds. The turbulence in the French market is expected to continue as markets digest the outcome.

In the UK, Rishi Sunak’s incumbent Conservative Party was outvoted by Labour in a landslide victory which was the first win for the centrist party since 2005. Compared to the French election, the outcome of the UK election was foreseen by most people and the result had already largely been priced in by the market.

Although there was some volatility leading up to the UK election, there was only a mild reaction within the UK market following the election results, with the FTSE100 rising 0.4%. This was, however, the best market reaction for the first day of a new UK Prime Minister since the stock index was created in 1984.

These two elections demonstrate the potential for global events to impact on volatility in markets, however, there is no clear rule as to how violent things can get.

Through constructing well-diversified portfolios, we minimise exposure to short-term market turbulence. This includes geographic diversification, with an emphasis on developed markets.

With the US elections coming up in November, we will also be discussing this closer to the event!

What we’re reading:?The Impact of Global Events on Financial Markets: Navigating Volatility and Uncertainty | by Wealth Web | Horizon Hub | Medium

Until next time!

Martin & Finlay

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