The market bounced on the news, with FTSE 100 gaining almost 1 per cent in the first few hours of trading.
However this week has been torrid with the index then having its worst week for 15 months. According to FE Analytics, the FTSE 100 has plunged 2.88 per cent over the past week.
Performance of index over 1 week
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0.%2002014_Article_charts_&graphics/20140926_political1.png)
Source: FE Analytics
The potential for UK involvement in airstrikes against the Islamic State, ongoing tension in Ukraine and an ever increasing expectation of rising interest rates have been the most commonly cited reasons for the markets’ decline alongside the expectation that a Labour win in the 2015 general election could have punitive costs for certain sectors, most notably tobacco.
Here we take a look at some of ways these events, while difficult to forecast, could affect your portfolio.
UK election
Next year’s general election is expected in May 2015, approximately seven or eight months away, but campaigning is already underway.
Leader of the opposition Ed Miliband used the Labour conference to make plain he was planning to tax tobacco firms if given a majority at the next election.
Imperial Tobacco and British American Tobacco have been some of the biggest winners as markets have recovered from the depths of the financial crisis.
They have returned 176.55 and 117.1 per cent since April 2009 compared to a gain in the FTSE 100 of 105.01 per cent.
Performance of stocks and index since Apr 2009
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0.%2002014_Article_charts_&graphics/20140926_political2.png)
Source: FE Analytics
The stocks have also been some of the best performing this year with investors and fund managers upping positions due to a perceived rotation away from growth stocks in the mid and small cap space to large cap defensive names.
In the IMA universe 17 funds hold both stocks as a top holding including many of the most popular funds such as Invesco Perpetual High Income, JOHCM UK Opportunities, Invesco Perpetual Distribution, Threadneedle UK Monthly Income and Invesco Perpetual Income & Growth.
FE Alpha Manager Neil Woodford also has both stocks and has made Imperial and BAT his third and fourth largest holding in his £2.6bn CF Woodford Equity Income fund, representing 12 per cent of the portfolio.
Speaking on the Today programme on Friday, Woodford said he was worried about an “anti-business backlash” in the run up to general election, which could affect companies including his tobacco holdings.
Another FE Alpha Manager, Mark Slater - who runs the MFM Slater Recovery, Growth and Income funds - recently told FE Trustnet that he was avoiding politically sensitive stocks altogether in the short term.
Richard Colwell, co-manager of the £3bn Threadneedle UK Equity Income fund, says he is expecting greater volatility in the coming months but will be buying any dips in politically sensitive stocks such as Imperial Tobacco and Centrica.
Other potentially politically sensitive stocks include those connected to the energy sector such as Centrica and those connected to the UK housing and mortgage market.
Scottish ‘devo max’
While the ‘No’ vote in the independence referendum was decisive and removes the spectre of many of the most serious economic consequences of a break-up to the union, in the market’s view risks remain until the extent of further Scottish devolution is clear, according to Algernon Percy, managing director at Waverton Investment.
“The ‘No’ vote has obviated many of the most serious economic concerns we had prior to the vote. However, the long-term consequences of this referendum are unlikely to become fully apparent for some time. The way the campaign unfolded has led to uncertainty and decreased confidence in both the integrity and constitutional stability of the United Kingdom,” he said.
“Despite the market rally last Friday, we are still cautiously reviewing UK assets, especially sterling and gilts, as they are increasingly exposed to rising political risk. Much of this is due to increased nervousness around Britain’s stability.”
The gilt market has risen by six per cent over the past year although it has taken a significant stumble in recent weeks as polls narrowed.
Investors appear to be regarding the asset class as more risky even after votes had been counted and discounting their value accordingly.
Performance of index over 1yr
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0.%2002014_Article_charts_&graphics/20140926_political4.png)
Source: FE Analytics
Sterling has also continued to slide in recent weeks and is currently down 4.89 per cent against the dollar since it reached a five-year high in July.
Performance of sterling vs the dollar since 2 July 2014
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0.%2002014_Article_charts_&graphics/20140926_political3.png)
Source: FE Analytics
Percy says the uncertainty and a more bearish sentiment from investors could linger into the medium term.
“It is likely that protracted negotiations will ensue for at least 18 months, not only between Holyrood and Westminster, but also within England where the ‘English Question’ is now high on the agenda.”