Ignore what happens across the pond next month at your peril. This year the most important event for British stocks may not be a Brexit trade deal, or even a new wave of lockdown measures, but rather the American election next week.
What happens in Washington DC sends ripples across the Atlantic that can turn into tidal waves.
Recently I have undertaken a great deal of personal analysis from my records and from all other available financial data that I have been able to get my hands on to see how British stocks have performed during American election years past. From this I have found a distinct and, quite frankly, surprising pattern.
In 14 out of 17 elections years since 1948, excluding the 2016 election, the FTSE All Share has risen, “ with a rather extraordinary average annual return " of 32.7pc.
This data analysis finding is even more surprising when measured against the back drop of the average annual gain of British shares, which has been about 9pc in the past century according to financial records.
New American presidents tend to unleash more spending, as promised in their campaigns, which is good for American companies. A strong American economy supports British companies as it is our largest trading partner, accounting for about 15pc of exports.
Investor sentiment also plays an important role. If investors are confident about American shares then this can spread to British ones as well. If they are pessimistic then it increases the chances that they will sell British shares.
A research paper by the CFA Institute, an association of investment professionals, last year found that investor sentiment has the greatest effect on FTSE 100 companies as they are more international than smaller “mid-cap” FTSE 250 companies.
But what is clear is that in the 2020 election, individual policies could also affect British shares. Right now we have the front runner Joe Biden, heading up the Democratic Party candidature, who is outspoken against the oil industry and said he would kick start a transition to renewable energy and electric vehicles. Inevitably this has sparked significant kick back from the oil industry major players being reported in all the major US news outlets.
However the truth of the matter is that consumer demand is pivoting away from fossil fuels. Over the last 12 months in the USA there has been a notable rise in Green Energy investment with funds prioritising environmental, social and governance principles (ESG).
In a clear acknowledgement of this BP the British energy giant’s strategy calls for a 40% reduction in oil-and-gas production over the coming decade, greater investment in low-carbon energy and a ramp-up in wind and solar power. This is the biggest policy overhaul in the company’s 111 year history.
If Biden were to assume POTUS status on 3rd November, and were to bring his election manifest into effect then not long after we would expect to see a cut in demand for oil from America which would send prices lower and hurt British producers, like Shell and BP.
On the other hand if Trump were to be re-elected then he could have the opposite effect.
Right now the polls are showing Biden ahead by eight points - but a lot can happen in the next eight days!