Alternatively, the lack of market repercussion was because the results do not really matter. Ahead of the elections we made the point that these events were political in nature and inherently unpredictable. We also said that company management are paid to produce returns for shareholders – whatever the weather.
Swings and roundabouts
A new president and a new position for the UK with regard to the EU do not destroy the prospects for businesses taken as a whole. There may be winners and losers but that changes such as these would materially alter the profit-generating ability of hundreds of listed companies is difficult to rationalise. Change presents opportunity for nimble, forward-looking and entrepreneurial firms.
Companies such as Apple and Amazon have rocketed in value in recent years due to the ability of their management to generate profit at the expense of the competition. Their spectacular success is not merely a function of changing politics but rather their ability to make best use of technological change.
The coming decades will be no different, except that the next disruptive technology will be different from the last. In fact, it may not even have been invented yet. The nature of stock markets is that new companies will eventually become large ones and some of today’s behemoths will slide from view. This has more to do with their competitive position, management and technological disruption than it has to do with politics.
It is also stretching credulity to say markets were not affected by these two events; it just depends on where you look. In the UK, there was a clear negative impact on sterling, which fell by more than 10% in the aftermath of the EU referendum.
Also, while the UK market fell in the hours after the result was published, the weakness of the pound was enough to see sentiment turn within a couple of days. The UK mid-cap index, considered to be more domestically focused took longer – but still just 31 trading days – to recover. The gilt market surged, with the yield of the 10-year gilt falling from 1.3% to 0.7% within a couple of weeks.
Furthermore, around the US election the Mexican peso was very sensitive to polling data, as weakness coincided with apparent Trump strength, and following the confirmation of the result the currency fell by 11.9% against the dollar.
In securities markets, US bonds sold off significantly on the back of higher expected interest rates. Other interest rate sensitive asset classes, such as credit, suffered as a consequence. Looking more broadly, emerging markets came under pressure from a confluence of concerns surrounding inflation, a strong dollar and the potential for dampened trade between the region and the US following president-elect Trump’s anti-free market rhetoric.
Opportunity in uncertainty
These past six months neatly demonstrate the unpredictability of politics. As valuation-driven investors, events such as these are most important in terms of how we manage risk in our strategies rather than how to direct trades themselves. Thus, while recent market moves and news are riveting, it does not necessarily help us to invest long-term client capital.
We prefer to compare prevailing market prices with what we believe the intrinsic value of an asset class to be. Periods of market uncertainty and volatility such as these present a good opportunity to find undervalued assets that can be invested in for the long term.
