When Richard Nixon was asked what he would be doing if he wasn’t President, he said: “Buying stocks on Wall Street”. One can only imagine the headlines. But it does raise the question, do politics and the markets ever mix? With our political system being dragged through the gutter will there be an effect on UK plc? Add to that the prospect of a change in government next year, and people might be moving their portfolios.
However, the real effect of domestic politics on UK shares or on sterling is not that obvious. There are just too many other external factors which have a much more direct impact on the market than expected or actual policy decisions, let alone a few scandals. Failed product launches or shrewd acquisitions are more likely to influence a stock’s price.
Politics forms part of a bigger picture. So for example, when credit rating agency Standard and Poor’s downgraded Britain’s credit score from “stable” to “negative” the pound fell from the 1.58 handle to the low 1.55s in a matter of minutes. Yet it had bounced back around 150 pips by lunchtime.
Support for the pound would have been gleaned from the subtext in S&P’s warning that the “next government” would have to act quickly and radically to reduce the scale of public debt. The implicit assumption being that, rather than reduce our triple-A rating now, we are given the benefit of the doubt that a change in government will bring a credible plan to pay the debt pack.
So, however much low politician’s approval ratings fall, unless the election is brought forward ahead of next summer, it is unlikely that the share and currency markets will follow. The markets have their own agenda and that is not up for election.