Does politics matter?
Does politics matter? As Theresa May triggers Article 50 and the debate fires up once more on the pros and cons of Brexit, it is easy to feel anxious. Don’t!
If you look at market charts over the past 30 years without a clear dateline you might struggle to identify major geopolitical events, like the wars in the Gulf (1990 and 2003) or changes of UK government (1997 and 2010) and the Scottish referendum (2014).
With the benefit of hindsight, we can conclude that it is often easy when in the midst of these events to over-exaggerate their potential impact on investment returns.
Some data may provide further reassurance. The Barclays Equity Gilt study shows that UK equities have beaten cash in nine out of ten rolling ten-year periods since 1899, and that over rolling 18-year periods, equities have outperformed 99 per cent of the time.
A lot has happened since 1899 and the years ahead will not be smooth. But good companies are remarkably resilient and adaptable. The impetus of making a profit tends to focus the mind, forcing bright managements to manage costs, make difficult decisions and identify opportunities that open up around them.
There will inevitably be some significant challenges from Brexit. The law of unintended consequences teaches us that there will be unexpected shocks ahead.
I prefer to dwell on Newton’s third law: to every reaction there is an equal and opposite reaction. This arguably applies to economics and politics as much as it does to physics.
There will be difficult consequences of leaving the EU but there will also be benefits. As an example, we may see the government able to support businesses through tax breaks and incentives in ways that would not have been permissible before.
The drop in sterling should support our exports and boost returns from those ‘quality compounders’ that make up a significant proportion of our investment focus. These are companies that are less sensitive to wider economic and political influences. They are providing the products and services that people will always need – whether May, Corbyn or even Farage are in power.
Of course that does not mean we can sit back and relax. We can mitigate risk and exploit opportunities, we can mould portfolios to preserve wealth and to benefit when markets over-react.
In the build-up to the EU referendum we increased cash balances and lowered overall equity weightings – particularly exposure to economically sensitive stocks.
This helped protect client portfolios in the immediate aftermath of the result. We then moved quickly to emphasise higher-quality equities with a bias towards overseas earnings within the UK element of portfolios. Again, this helped drive performance as sterling’s decline gave a positive impetus to many firms in the FTSE 100 index.
During the American election we refused to discount a Trump victory. We reduced US Treasuries because of inflation concerns and maintained our neutral position on US stocks. We argued that a business-friendly Trump agenda would initially be positive (and that it would take time to feel the drag of a protectionist agenda if enacted). Clients subsequently enjoyed the surge that Trump’s victory brought to markets.
More recently we have been cautious but grow increasingly convinced that the recovery has legs. The company management teams we meet seem to be displaying greater confidence, especially when you look at domestic businesses. Many are investing for growth, which gives us reassurance.
We are not getting over-exuberant but are running equities at neutral levels, watching the signals closely. Meanwhile we are underweight fixed interest, asking why would you enthuse about some investments that would, if held to redemption, lose you money?
Our ability to buy individual stocks benefited portfolios throughout 2016 as we were able to identify good individual stocks that had been oversold. Being able to build core portfolios using direct equities allows us to back our prudent conviction. We believe we can generate long-term returns from investments that are opportunely priced.
Yes, there is a lot we can do to help ride the storms that markets always face and we never stop looking at ways we can improve our processes. Ultimately, though, the best thing we can do is help clients take a calm, long-term view.
So, take the words of economist doomsayers with a pinch of scepticism and resist any temptation to panic. Remember the words of J K Galbraith: “The only function of economic forecasting is to make astrologers look respectable.”
James Horniman (Scorpio)
Published 29 March 2017
You should not act on this content without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.
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