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16/02/2017

Does it matter which way the vote goes?

Left or Right? Is there a pattern?

On 23 June 2016, the UK electorate voted to decide on membership of the European Union (EU). The outcome, unexpected by many, caused sterling to tumble. Within a month, the trade-weighted pound was about 10% lower than its level a month before the vote.

Unquestionably, the decision had a big impact on investor returns. Many labelled Donald Trump’s presidential election victory the result of a similar populist phenomenon, but the dollar closed about 3% higher a month after the election compared with a month before.

The Brexit referendum created more uncertainty whereas Trump’s win, although not predicted by most, at least gave some direction. So surely that must be the tendency for elections? But it isn’t. While many studies look at the trend of the dollar over a presidency, it is interesting to look solely at the election itself.  

Since President Jimmy Carter, the trade-weighted dollar usually strengthened over the month before and after the election of a Democrat by 4%, whereas for Republicans, it depended on who won. The dollar declined 4% when George Bush Sr and George Bush Jr were elected, but rose with Reagan and Trump – possibly due to expected spending plans.

In the UK, since 1974 sterling tended to rally a few percent over a similar period after Labour came to power (except Tony Blair’s victory in 2005). But it tended to weaken for a fortnight following a Conservative victory before making some gains (except David Cameron’s surprise majority in 2015), and is usually lower over a month-before-month-after period.

Left or right?

It seems a right-wing win weakens a currency while a left-of-centre strengthens it, even in Japan (figure 1). Over the past 20 years, the yen fell a few percent – aside from Prime Minister Shinzo Abe’s 2014 win – with each Liberal Democratic victory (the Japanese conservatives) and strengthened more than 5% when the centre-left Democratic Party won in 2009.  

Consequently, with the euro zone facing six planned national general elections within 12 months, the euro may get a bit jumpy. No definite trend has really emerged yet – especially as national votes are less meaningful to the EU as a whole – but it does seem that the euro rallies when left-of-centre parties win in larger euro zone countries – unless the victor is François Hollande.

For the long-term investor – more interested in economic fundamentals, the interplay of interest rates and relative purchasing power – the transient effect of elections may not be a prime investment factor. Yet, it can have an impact on the short-term volatility of returns.

 

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