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Election tactics could reveal potential returns

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Uncertainty is par for the course in the period running up to an election, but, says Allan Lane (pictured), co-founder of ETF data provider Algo-Chain, “whatever the outcome, in investment terms, the asset classes that will be most affected in the forthcoming general election will be UK equities and fixed income, particularly inflation-linked and corporate bonds, as well as UK-focused property funds.”

Vanguard’s Jack Bogle might recommend that passive investors should just sit back and watch their well-designed portfolio fluctuate in the short-term, but Lane also acknowledges that there are a few ways that one can prepare. “There is a need sometimes to make tactical decisions,” he says.

 
Lane gives the example of gauging the differences between UK equity indexes. “The FTSE 250 is more about GBP, whereas the FTSE 100 is not really linked to the UK economy, so the behaviour of the two will be quite different.
 
“And with so much political indecision in the last three to four years and both parties slugging it out to see who can come up with the biggest borrowing figure, we could see a big expansion going forward,” states Lane.
 
“It is fair to say that a lot of investors outside the UK have made their moves and, despite some reports, we are seeing flows into UK equity,” he adds.
 
Algo-Chain reports that in the last month, the UBS ETF MSCI UK received inflows of over GBP1 billion and the Vanguard FTSE 250 UCITS ETF received just over GBP664 million. “It is exactly what I would expect to happen at this point in the election cycle, particularly after three years of Brexit indecisions,” comments Lane.
 
However, he believes that in the fixed income market it is harder to know what might happen. For example, in the last six weeks the UK inflation-linked bond market has lost around 8 per cent. “Is that because people think there is a change of policy in the issuance of linkers or is it all down to a strengthening Sterling? Who knows? But you could say that there has been a lot of repositioning.”
 
Lane notes that at least 50 ETFs in fixed income have lost 5-10 per cent in sterling in the last month. “Some of that is currency effect, but the winners are only up 1 per cent; the market has been skewed to the downside,” he says, adding that the top four ETFs are all currency hedged.
 
One sector which could benefit from a hung parliament is ESG says Lane. “Minority parties might get a seat at the table and their value system is aligned to niche parts of the business environment.
 
“There could be certain parts of that ecosystem that might hit boom times and we could see ESG moving into the mainstream. All of which might be good for the FTSE 250.” The S&P 500 already has 334 stocks that are considered ESG eligible.
 
Notwithstanding all this, 2019 is proving to be potentially one of the strongest years ever for model portfolios, says Lane.
 
“Normally portfolios struggle to get between 6-8 per cent for the year, but so far this year they are ranging between 10-15 per cent. Although they could lose half of that between now and Christmas.
 
“What is going to happen to UK markets based on the election also coincides timewise with a lot of situations happening elsewhere. The election is a big event for UK investors, but others might view it as just local politics. Whichever party wins, the Chinese stock market will not be influenced, and neither will the Australian.”
 

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