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Investors to see boon in coming months as UK stocks up 3.4% in Q4 of election years

Journalist: John Choong (Head of Markets and Research), Newspage

ended 02. October 2024

With this week marking the start of Q4, investors may be set for a boon in the lead up to 2025. Research from Newspage found that UK stocks have historically performed well in the final quarter of an election year, since 1987. By proxy of the FTSE All-Share Index, UK equities have risen by a median average of 3.4% over the past nine election cycles, only failing to eke out positive gains in two of them.

Having said that, it's worth noting that those two instances had only occurred when the Bank of England (BoE) was halfway through its rate-hiking cycle, in 1987 and 1997. In all other seven instances when stock prices went up, the Bank had already been half-way through its rate-cutting cycle or had rates at sub-1%.

However, the same trend isn't seen with small and micro-cap stocks on the FTSE AIM All Share Index, where volatility is more prevalent, as returns were negative in 2005 (BoE had cut rates), as well as in 2015 when returns were flat (sub-1% rate). That said, the FTSE 250 Index have found the most success over this time period, gaining a median average of 9.1%, as compared to its larger-cap/FTSE 100 (2.8%) and smaller cap/FTSE AIM (4.1%) peers.

Newspage asked traders, analysts, and IFAs for their thoughts on the outlook for UK stocks, what potential upside or downside risks there are to this trend, and how the upcoming Budget could impact near-term performance.

5 responses from the Newspage community

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Editor
Gabriel McKeown
Head of Macroeconomics at Sad Rabbit Newsletter
As the curtain rises on Q4, UK investors may be poised for a post-election windfall that could make even the most hardened City traders crack a smile.

An analysis of historical performance suggests that the final quarter of 2024 could be a veritable feast for UK equity markets. However, the BoE's monetary policy stance is critical to this phenomenon, as the Bank had embarked on a cutting or holding cycle in the periods where gains were achieved.

Furthermore, asset allocation will be crucial to generating returns, with mid-caps providing greater exposure to the underlying domestic economy. Additionally, historical data suggests that certain sectors may be particularly well-positioned for this potential rally. With industrials, utilities, and property having been outperformers in past cycles, while the energy sector underperforms. As British stocks remind the world why London remains a financial powerhouse, savvy investors must keep their eyes peeled for the true titans of returns.
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Editor
David Belle
Founder and Trader at Fink Money
There’s something we can look at here and it’s really down to the US. Approximately 75% of FTSE 100 sales are USD denominated. Thus, with US growth being strong, we have to simply focus on that as the key driver. Is US growth waning? No, not really. What could give an even stronger boost is if sterling has a bit of a retreat from here.
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Editor
Colin Low
Managing Director at Kingsfleet
"Past performance is no guide to the future", apart from when we think it is, obviously! There ceretainly appears to be a correlation in this information, but no investor should ever rely solely on that to make an investment decision.

Certainly, investment is for the long term and not for short term speculation. So, whilst a pleasant short-term boost will certainly be welcome, it is unlikely to make a material change in the value of someone's pension over a 30 or 40 year-term.

It's a reminder that during one's lifetime of savings, there may be periods of sudden growth but also long periods of downturns. They feel like huge mountains and valleys now but when we look back, they will appear as mere undulations — and that is the only past performance that can be truly relied upon.
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John Choong
Head of Equities and Markets at Investors Edge
Considering the of a recession happening this year are rather low, combined with the interest rate outlook, the stars are aligned for investors to experience a golden quarter.

This would especially be the case for those invested in the FTSE 250, who could see their mid-cap stocks generate thrice the amount of returns than their mega-cap counterparts. We believe this dominance is likely to repeat itself, as a stronger pound will serve as a bigger headwind to FTSE 100 companies who generate most of their profits abroad and will have to convert those profits back to the pound, as opposed to mid-caps, who generate most of their profits locally.

That said, a number of downside risks prevail. One of which is markets not reacting favourably to Reeves's upcoming Budget. Another would be the lack of a Santa rally materialising in December — historically a key catalyst for a stronger showing in Q4 — which could end up seeing UK shares fall flat.
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Faisal Sheikh
Managing Director at Monmouth Capital
Even if you count all the election years since the Second World War, you are still talking about a very small number of events. It’s unlikely to be statistically significant.

Whether the UK market is up, down or sideways in any given quarter is a coin toss.

What’s more reliable is that the total return from investing in equities tends to rise over time. So the best general guidance I could give is to stay invested and avoid overanalysing.