Iona Bain
Recent shock events on both sides of the Atlantic have not so far produced the market downturn that many commentators had feared. Now the consequences of Brexit and Donald Trump’s election victory are playing out on the world stage, should investors start to worry?
So far, the UK stock market has actually benefited from the vote to leave the European Union (whatever you might think about it personally), with the FTSE All-Share up by 17.8 per cent since the referendum last summer. The plunging value of sterling, combined with higher commodity prices and the strong performance of numerous companies listed in the UK, mean domestic equities have actually returned nearly 25 per cent since June 2016.
Similarly, US equities have seen a so-called Trump bump, with markets rising by more than 10 per cent since the presidential election as investors bet on higher economic growth and greater corporate profits on Wall Street. The yellow-haired one might not be inspiring confidence in all, but (so far) it seems to have the backing of America PLC – which matters for markets.
But will recent events prove to be a turning point? Recently, Article 50 was triggered by Prime Minister Theresa May, starting the process of the UK leaving the EU. Meanwhile, President Trump has attempted to repeal the previous administration’s healthcare legislation – without success. This is one of his major boo-boos since coming into office and it could suggest one of two things; that his bark is worse than his bite, and his more extreme policies on economic isolationism and reflation might not come to pass…or that more radical policies which could reinvigorate America’s economic prospects will also turn out to be pie in the sky.
Both the FTSE 100 and the pound have remained relatively steady. In the US the Dow Jones Industrial Average index has been bobbing up and down following a sustained period of falls as markets digested Trump’s healthcare failure.
Laith Khalaf, a senior analyst at investment broker Hargreaves Lansdown, said the case for investing in UK equities remains “undiminished” by Brexit, with the stock market providing returns of nine per cent a year for investors since Britain crashed out of the European Exchange Rate Mechanism in 1992.
James Horniman, a portfolio manager at James Hambro & Partners, agreed. “It is often easy in the midst of these events to over-exaggerate their potential impact on investment returns,” he said. “If you looked 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 or changes of UK government.”
He pointed to the Barclays Equity Gilt study, which shows that UK equities have beaten cash in nine out of ten rolling one-year periods since 1899. 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,” Mr Horniman said.
“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.”
And other investment experts say you should take economic and political noise coming from the U.S. with a (slight) pinch of salt (at least when it comes to managing your investments). Jason Hollands, managing director of financial advisory firm Tilney, said the recent failure of Trump to get enough support to replace Obamacare serves as a warning “not to place excessive faith in politics when it comes to investment decisions”.
He added: “There’s no doubt this raises questions about whether he will disappoint on other key policy areas such as tax reform and infrastructure spending.”
Hollands argued that investors should remain focused on investment fundamentals rather than second-guessing political events or predicting currency movements.
“This means running with a diversified portfolio, focusing on markets where valuations are not extreme and selecting well-run funds that target high-quality businesses that are not heavily indebted, which provide products and services in areas with structural growth, which have stable margins, strong cashflow and are not vulnerable to commoditised price competition,” he said.
He is more upbeat about investment opportunities in the UK, where price to earnings multiples are “less stretched” compared to the US, and tips funds like Liontrust Special Situations and Evenlode Income to perform well.
We’ve also talked on the blog about investment opportunities on the continent. Fund managers are majorly keen on how cheap Europe now looks in comparison to the US and UK. This is because investors are pricing in the risk of further political upsets, particularly in the upcoming French presidential elections, despite the fact that the populist Party for Freedom failed to take power in the recent Dutch elections.
Jon Day, fixed income portfolio manager at Newton Investment Management, said he was “relaxed” about political risk in 2017 compared to last year because European elections are “much less clear cut” than the binary events of 2016.
“While Europe remains politically volatile, volatility itself can also provide opportunities because the underlying risks which drive it often turn out to be less extreme than markets initially fear,” he said.
Michelle McGrade, chief investment officer at TD Direct Investing, said there were signs of a cyclical recovery across Europe, supported by a central banking system that is willing to lend and the end of deflation. She pointed to Henderson European Selected Opportunities as a way to tap into the likely growth of European banks, thanks to improved capital ratios, as well as BlackRock Continental European Income and Jupiter European Special Situations, both of which could benefit from “high single-digit earnings growth” this year.
PLEASE NOTE: This ain’t financial advice. None of the funds, sectors, assets or strategies mentioned in this blog should necessarily form the basis of your investment approach unless you have carefully assessed that they fit in with your risk appetite, goals and investment timeline. They are not absolute recommendations endorsed by the Young Money Blog, and we express no particular preference for any one sector, fund or strategy. These are suggestions made by independent experts as examples of the areas that investors could consider in the current climate. Your money in the stock market could go up as well as down and you may lose your initial investment. If you are uncertain about making specific investment choices, you can use an online investment service to make decisions on your behalf, and you could also consult a financial adviser if you’re not sure.
