Looking into the relationship between politics and investing.
Should investors pay attention to politics?
Over the last two weeks, politics have dominated the headlines, with the midterm elections creating excitement in the US and the next stage of the Brexit process bringing drama to the UK political scene.
However, should most investors be paying active attention to politics – or, as could be said of the US president, is the bluster far greater than the reality?
All bark and no bite
It is tempting to draw a clear line between politics and financial markets. Senior economic figures, such as the governor of the Bank of England and the chancellor of the exchequer, have cited research to suggest that Brexit will take a toll on the UK’s economy, for example. Similarly, Trump’s protectionist rhetoric and wide-ranging tax reforms were described as economically revolutionary by some quarters.
In both cases, markets reacted with a jolt to the unexpected outcomes of the popular vote. Yet, since the vote for Brexit in June 2016 and Trump’s election in November 2016, both British and US markets have continued on the broad (upward) trajectory they were following from 2008 onwards – at least until last month.
This pattern has been replicated time and again, when presidential elections have either had little effect on markets or have prompted a short-term spike or slump before markets reverted to their previous course.
In 2008, for instance, the financial system was already experiencing a domino effect of collapses, which were inevitably going to drive markets downwards.
Ignore the hype
This phenomenon makes sense: while economic policies can have an impact in the short term – notably in periods of crisis or when they go horribly wrong – in the long term they tend to take years if not decades to play out, as discussed here.
It’s because of this that many professional investors claim to ignore the ebbs and flows of politics entirely when making allocation decisions. For instance, the team that manages Baillie Gifford’s US Growth Trust has said “prognosticating on politics and macroeconomics can be interesting, but transposing these opinions into sector allocations is not a reliable way to make money in the long run.” Nick Train, manager of the Finsbury Growth and Income Trust, is similarly blasé about investing on the basis of short-term political noise – an unsurprising perspective, given that Train’s portfolio turnover is famously low with just two new additions in the last four years.
Indeed, what unites these investors is that they invest for the very long term, so the prospects for a company holistically and its valuation at the point of purchase are much more important than short-term shifts in market sentiment driven by politics.
And this rule can apply to investors too. If your investment horizon is longer than a year or two, it could make sense to look beyond political crunch points, which history suggests will almost always be a short-term blip on your investment chart.
There are though some investors who seek to use politics to their advantage. For instance, Mark Barnett of Edinburgh Investment Trust, looks for opportunities thrown up by the negative sentiment that is often pervasive in markets around political events.
It is this drive that led him in 2017 ahead of a snap general election in the UK to tilt away from stocks that he saw as relying on a weak sterling to maintain momentum. Instead, he added more domestically-focused UK equities to his portfolios, which had been maligned since the Brexit vote, such as property companies including Shaftesbury, Derwent London and NewRiver Reit. He argued that the sector had suffered an indiscriminate re-rating in the wake of the political upset, ignoring some of the strong fundamentals of these businesses, such as Shaftesbury’s exposure to the resilient West End.
Politics can also be key for specific asset classes. For example, Gervais Williams and Martin Turner of Miton UK Micro Cap invest in the smallest businesses in the UK. They consider politics as very important for their asset class, which they see as ripe for political upheaval on the basis that rising populism in the UK is a reflection of a general backlash against globalisation.
However, it is important to note that Williams and Turner believe that broad-based political sentiment is turning in favour of small, domestic businesses, rather than any single political stream driving this change. In this case, it is less the ruminations of the political classes that matter and more the sociological shifts that politics tends to embody.
Why politics matter
The role of politics in markets is not clear cut. Certainly, there is little reason to rush to the exit should an unexpected political event or outcome occur given how markets have historically rebounded from event-driven slumps. However, some investors have found tactical opportunities in amongst political upheaval. Whether it’s taking advantage of indiscriminate selling or investing on the basis of a fundamental societal shift, it is possible to benefit from the influence of politics on markets – but only by remaining cognizant of the long-term factors underpinning stocks and sectors.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees