Could Johnson’s confidence crisis hit your investments?

Here’s how to protect your pennies from political turmoil

Markets hate uncertainty and the PM’s future is exactly that (PA)

The blue-chip FTSE 100 index rose modestly in the wake of Boris Johnson winning his confidence vote, but a wavering pound, notoriously fickle stock markets and international economic stress mean investors are being cautioned not to make any sudden moves.

During this time of financial uncertainty, how can investors shield themselves from such periods of volatility – and could you even benefit?

Rarely lingered

According to Ed Smith, co-chief investment officer at Rathbone Investment Management, political issues don’t usually have a significant impact on investments.

“Investors worried about the uncertainty should note that even general elections very rarely have more than a momentary impact on asset prices,” he said.

Hardly ever does the impact linger. “Exceptions can result if it means a significant shift in attitudes to private property, fiscal policy or trade policy,” he added.

Positive impact

Giles Coghlan, chief analyst at financial trader HYCM, said the run-up to Monday night’s vote had been “mildly positive” for both the UK stock market and the pound.

“Despite turmoil in the House of Commons, the FTSE was up 1.1 per cent on Monday owing to slight improvements in the overall market sentiment,” he said.

However, this is unlikely to last. “Broader global concerns about the war in Ukraine and quantitative easing from central banks are likely to lead the agenda for any big market moves,” he added.

Lack of confidence

The pound is under pressure as traders digest the “unconvincing” confidence vote victory, according to Victoria Scholar, head of investment at Interactive Investor.

“The currency is suffering amid a lack of international investor confidence in the UK both economically and politically with criticism of Johnson’s leadership expected to continue and the potential for government legislation to be blocked by members of his own party,” she said.

Uncertainty will remain

Danni Hewson, financial analyst at AJ Bell, branded Johnson’s current position as “precarious” and pointed out that stock markets don’t like uncertainty.

“Markets are prepared to deal with a change at the top because fiscal policy would be unlikely to change dramatically if the government of the day remains in situ, but this half-way house creates instability,” she said.

Response to markets

Darius McDermott, managing director of independent research centre FundCalibre, warns against making knee-jerk reactions when stock markets are volatile.

“It’s important not to panic,” he said. “Sometimes the worst thing you can do is redeem your investments as you’ll just be locking in losses.”

He pointed out that political events don’t tend to affect the stock market in the longer term, so it’s best to sit back and do nothing.

“If you don’t need the money any time soon, just leave it alone,” he said. “Review your goals and portfolio and ask yourself if it is still going to do the job for you.”

“If you want to take advantage of volatile markets and can stomach some risk, you could consider buying on the dips, which means topping up holdings in UK equities as prices fall,” he added.

Smooth the volatility

McDermott also suggested investing monthly, rather than in a lump sum, so the stock market volatility is smoothed through the concept of pound-cost averaging.

This technique sees investors paying a set sum each month to buy units of a fund at whatever price they are available.

For example, if you regularly invest £200 into the fund and have been buying units at £8 each, when they fall down to £6 you will get more units for your money.

Funds to consider during uncertainty

McDermott highlighted a number of portfolios that could be worth considering during volatile or challenging market periods.

“The Threadneedle UK Extended Alpha fund can make money from [both rising and falling] share prices, while Ninety One UK Alpha is well-diversified,” he said.

He also highlighted the City of London Investment Trust. “It’s had the same manager for 30 years and has survived all sorts of market ups and downs,” he added. “At times like this, a steady pair of hands can be very reassuring for investors.”

Balanced portfolio

According to Ben Yearsley, investment director at Shore Financial Planning, diversification is one of the keys to having a balanced portfolio.

“You don’t want all your investments pointing in the same direction and being driven by the same factors,” he explained.

For example, some investors may have a few funds from the same investment house but they may have a similar focus, such as a growth style of investing, so won’t be as diversified.

“You need different styles and types of investment to give balance and not just geography,” he added. “You can take advantage of sharp falls to top up your favoured holdings, but just remember to invest for the long term and not as a short term pick me up.”