Election 2019 - Uncharted waters
We are a few weeks into the election campaign and the outcome is far from certain. The campaign will be the biggest talking point between now and December 12th, so I wanted to offer some thoughts on our approach to investments in these uncertain times.
The bulk of this message is taken from a briefing note from a well-known investment house. Whilst I acknowledge their contribution, I take responsibility for the views expressed below.
While these are uncharted waters, political uncertainty is nothing new. On this occasion, as in the past, people will jump over themselves to tell you the “right way”. Whether we are judging the merits of the parties or working through our investment positioning, we must favour research over reaction and urge all our clients to do the same.
Chief among these is the temptation to react too quickly or with too much confidence in the lead up to the outcome of this significant event. If you are cynical of this stance, I share the below quotes from the U.S. election and Brexit referendum, where even the smartest of people got it grossly wrong.
Incorrect U.S. Election Predictions (U.S. stocks rallied 2.22% on the day after the election and around 9% in the three months following)
- “We would expect a small global stock market rally if Clinton wins (about 2 percent) and a large decline if Trump wins (about 10 percent)”. Eric Zitzewitz, Professor of Economics at Dartmouth College
- “The S&P 500 will fall by 3% to 5% immediately if Trump is elected”. Tobias Levkovich, Citigroup's chief U.S. equity analyst
- “If investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.” Simon Johnson, professor at MIT Sloan and former chief economist of the IMF
Incorrect Brexit Referendum Predictions (U.K. stocks fell 3.15% the day after the referendum but gained around 13% in the six months following. Economic growth also continued to rise)
- “A vote to leave would tip our economy into year-long recession with at least 500,000 UK jobs lost”. George Osborne, served as Chancellor of the Exchequer under Prime Minister David Cameron
- “Leaving Europe would tip the country into recession”. David Cameron, ex-Prime Minister UK
- “Brexit would trigger recession”, predicted -0.3% GDP for Q3”. IMF Forecasts
- “Short term impact of -1.25% GDP”. OECD Forecasts
- “It would be likely to have a negative impact in the short term… I certainly think that would increase the risk of recession”. Mark Carney, Bank of England
What about a Corbyn government?
Political biases aside, two of the widely quoted risks to investors seems to be in a Corbyn government or a hung parliament. It is easy to build an ugly bear case—no matter which scenario you look at—and we are mindful that the media will take full advantage of this fear-driven sentiment (they want to sell newspapers after all). We urge investors to keep a level head, and while these issues have substance, investors should look through media exaggeration as political risk is largely unpredictable.
It is for circumstances like this that we take a diversified approach. Most of our investment solutions limit the risks by spreading your investment eggs across different baskets. This means we have global exposure, defensive exposure and different currencies, to name a few, which would all help buffer any election risks.
Don’t rush to any rash decisions
The key question on many peoples lips maybe whether to sell, hold or buy. In our view, investors should not to rush to any rash decisions as their funds and portfolios should have been selected for the longer term and to manage the various risks.
Any turbulence in markets may create great opportunities to purchase assets that will add meaningfully to returns in the future. The markets are relatively stable at the moment, but fund managers will normally look for opportunities when they arise.
The current period is very unsettling for investors and they may be anxious or concerned about events.
If you have any questions or any concerns about your own funds or portfolios you should contact your own financial adviser who should be pleased to discuss anything that concerns you.