Mar­kets’ re­ac­tion to a very tur­bu­lent year full of many sur­prises

Belfast Telegraph - Business Telegraph - - Platform - By jamesina doble, di­rec­tor of in­vest­ment man­age­ment, John­ston camp­bell Jamesina Doble is di­rec­tor of in­vest­ment man­age­ment with Belfast wealth man­age­ment com­pany John­ston Camp­bell

The po­lit­i­cal world has been on a roller coaster over the last year or more — and there’s no sign of it slow­ing down. The ques­tion is: are in­vestors nav­i­gat­ing sim­i­lar lev­els of in­sta­bil­ity or are the mar­kets bear­ing up de­spite the storms rag­ing all around?

We’ve had the shock Brexit re­sult, fol­lowed by a Trump vic­tory in the US pres­i­den­tial elec­tion that caught every­one nap­ping.

Then, just when it seemed we were strapped into the in­evitabil­ity of a slow grind to­wards Brexit, Theresa May’s ill-con­sid­ered de­ci­sion to call a snap West­min­ster elec­tion pro­vided an­other per­fect il­lus­tra­tion of the law of un­in­tended con­se­quences.

In­stead of shoring up her Brexit strat­egy with an unas­sail­able man­date, the elec­tion left an un­sta­ble govern­ment tee­ter­ing just when sta­bil­ity is most needed and forc­ing it into a deeply un­pop­u­lar agree­ment with the DUP.

With all the old cer­tain­ties turned on their heads, you might ex­pect to find in­vestors nav­i­gat­ing their way through sim­i­lar lev­els of tur­bu­lence.

What we’ve found in the past is that po­lit­i­cal in­sta­bil­ity is gen­er­ally not good for mar­kets, in­creas­ing volatil­ity as in­vestors grow skit­tish. But this time, that per­ceived wis­dom has been over­turned — and the mar­ket re­ac­tion over the year has di­verged sub­stan­tially from what might have been pre­dicted.

We’ve seen some un­ex­pected mar­ket trends over the past year — for ex­am­ple, while US stocks took a tum­ble dur­ing Trump’s late-night sur­prise vic­tory on Novem­ber 8, they made a quick re­cov­ery, with all ma­jor US in­dexes set­ting all-time highs in the fol­low­ing weeks. Mean­while, ahead of the Brexit vote, the In­ter­na­tional Mon­e­tary Fund was fore­cast­ing a stock mar­ket crash and a steep fall in house prices in the event of a Leave re­sult.

While the panic in the wake of that Leave re­sult did wipe a stag­ger­ing $2trn off global mar­kets, that mar­ket cor­rec­tion proved to be short-lived.

While the pound moved lower, the UK stock mar­ket, in par­tic­u­lar, pro­vided more re­silient than an­tic­i­pated, thanks in part to the in­vestor ap­petite for UK stock with for­eign earn­ings.

Mean­while, the Con­ser­va­tives’ mi­nor­ity re­sult in the West­min­ster took the in­dus­try by sur­prise, yet mar­ket re­ac­tion re­mained rel­a­tively sub­dued thanks to a Tory govern­ment re­main­ing at the helm and a hard Brexit look­ing less likely.

In­vestors sat tight, know­ing there would be no dra­matic changes in do­mes­tic pol­icy as there might have been un­der a new Labour govern­ment.

The re­sult played out through cur­rency move­ment, with the pound weak­en­ing against the euro and the dol­lar, but in turn this pro­vided a boost to the FTSE100.

More than 70% of the index is made up of over­seas earn­ers listed in the UK who tend to ben­e­fit from earn­ings in cur­ren­cies that are stronger than the pound, so a weak­ened cur­rency pro­vided them with a boost.

This ex­plains why there has been so lit­tle mar­ket move­ment de­spite an ap­par­ent in­crease in un­cer­tainty, al­though the FTSE250, a bet­ter barom­e­ter of UK sen­ti­ment, was trad­ing lower in the wake of the West­min­ster elec­tion. Fears of the Brexit re­sult ex­ert­ing a domino ef­fect to de­liver pop­ulist votes in other Euro­pean elec­tions have not been re­alised, lead­ing to a steady­ing po­lit­i­cal sit­u­a­tion on the con­ti­nent and global po­lit­i­cal un­cer­tainty has also de­creased.

How­ever, while mar­ket tur­bu­lence has been lower than ex­pected, all is not rosy for the UK econ­omy, with Ar­ti­cle 50 ne­go­ti­a­tions cast­ing a shadow over com­pa­nies fo­cused on the do­mes­tic mar­ket and chief fi­nan­cial of­fi­cers ad­mit­ting to be­ing in­creas­ingly pes­simistic about neg­a­tive long-term ef­fects from Brexit.

Don­ald Trump’s elec­tion win caught every­one nap­ping

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