Taking the long-term view

By John Husselbee, Liontrust

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In my experience in fund management over the past 30 years, political risk in portfolio management has traditionally been more associated with emerging market economies, rather than those in the developed world.

The simple rationale behind this is that governments have typically been considered less stable in emerging markets, a big part of the reason investors demand higher compensation for this risk premium.

However, the surprise result in the UK’s referendum on EU membership has challenged this notion and serves as another reminder that, in politics, we can take nothing for granted.

It has been suggested that Brexit was a protest vote triggered by the rise of popularism. Whether or not this is the case, the voice of nationalism can now be heard louder and louder, both here and in the rest of the world. It seems that many citizens in the West are becoming more and more frustrated by an era of globalisation, which has effectively redistributed wealth by promoting the growth of the middle classes of the emerging markets.

I recently attended a fund manager presentation that discussed this topic in some depth, with data showing the shrinking of global inequality but, more importantly, the stagnation of the standard of living in the developed world. This also has to be considered against increasing local inequality, as central bank intervention post the Lehman Brothers’ collapse has severely damaged the cash savings market and fuelled an equity bull market in the absence of any real resurgence in economic growth.

In the US, nationalism is a bandwagon for which presidential candidate Donald Trump is more than happy to sit in the driving seat. He has already pledged to his voters a renegotiation of trade agreements with China and close neighbour Mexico. It seems that Hillary Clinton is also not adverse to similar narrative on the question of trade.

Whether building a wall or US corporates re-shoring their manufacturing from overseas, this is protectionism. These moves are potentially barricades to global economic growth, to which the US remains the largest contributor. We must also not forget the global economy is only showing modest growth while still trying to shrug off the long-term deflationary effects of cheap global manufacturing and, since summer of 2014, a significant fall in oil prices.

For investors, all this means further uncertainty but of the political rather than the financial variety. Although Prime Minister Theresa May has finally confirmed plans to trigger Article 50 by March 2017 at the latest, stimulating Britain’s official exit from the EU, no one can predict how markets might behave before and after that date. And across the Atlantic, the US presidential campaign race has now entered the final lap with the first of the live TV debates. It seems, for now, that the markets believe that Clinton will persuade her nation to elect the first female president to the White House.

These short-term outcomes and others, whether elections in Europe or a referendum on political reform in Italy, were never easy to predict in the past and even less so today. We believe an investment process should be based upon more certainty and, in order to find that in investment management, you have to adopt and maintain a process that focuses on the long term.

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