Most investors use political events as a trigger to make changes in their portfolio and yet we are not convinced that you can trade on the back of political headlines with any effectiveness. True, had you properly forecast the outcome of the Brexit referendum, you might have made quite a bit of money on the currency, but this extraordinary event is a one-off. History is littered with examples of market miscalculation of political events. When Donald Trump scored an upset victory to become US President, many market participants assumed equities would sink.
Equities did so for a couple of hours and then proceeded to rally strongly. Likewise, European political risk has picked up sharply this year and yet the valuations of European equities and their US equivalents on a sector-by-sector basis show no daylight between them.
The latest developments are in the UK. The headlines show PM Theresa May fighting on three fronts simultaneously: against the Brexiteers, the Remainers and the EU. Yet sterling rallied after the resignations of two senior Cabinet Ministers last week and the FTSE is actually ahead of European markets year-to-date.
The mid-term elections in the US are another source of political uncertainty.
Historically, however, markets have rallied after the polls regardless of who has won, simply relieved that the uncertainty has been removed. Furthermore, we recently reviewed our investment in Indian equities, and despite the huge risks to the markets when there is an election upset, we discovered that Indian stocks performed equally well under different governments and coalitions over the decades. Why trade on the back of a headline when you can buy a good growth story?
Markets love to fret about political events but over the long run, politics don’t matter and won’t affect corporate returns or performance. Better to concentrate on picking the right investments and let politicians come and go in the meantime.