Investment Newsletter May 2017
What political risk? We have spent a lot of time recently pondering political risk, and the potential effect on investment portfolios.
Mike Deverell
From Brexit to Trump, French presidential elections and now another UK general election, it seems that the world has become particularly uncertain recently. However, whilst we have to be mindful of such risks and try and work out what might happen to our investments in any given scenario, we also have to be conscious of not giving politics too much weight in decision making.
Investment Manager
For example, the US election and the EU Referendum both had only two realistic outcomes. These were two cases where the outcome could have a significant impact on the future direction of the relevant country, where the polls were extremely close and the result highly unpredictable.
However, even those investors who did correctly predict these results and adapted their portfolios accordingly have often been caught out. For example, many people thought the UK stockmarket would fall if the Leave side won the referendum, and global stocks could be hit if Trump was elected. That turned out to be the opposite of what actually happened. Those who correctly predicted the political outcome were often unable to predict the market reaction. These things can be complicated and there are always several different factors influencing markets at any one time. In addition, one asset class can often have a knock-on effect on another. For example, after Brexit the pound fell sharply which many people had correctly anticipated. This led to a rising FTSE 100 index given that many of those companies make their profits overseas, and have been helped by a weaker currency. Fewer people anticipated this effect.
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