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Equity markets stay relaxed about politics

The impact of European politics on financial markets has been much less marked than many analysts would have you believe.

In the UK, the base case of a continuing Conservative government proved to be correct, though the lack of a convincing majority has led markets to impose a political risk discount on sterling. On the continent, Emmanuel Macron’s win in the French presidential elections was expected and led to no surge on the French market.

The FT fund has done well in recent weeks and is now up by more than 6 per cent in 2017, despite my decision to keep 40 per cent in bonds for risk reasons.

As I hoped, more investors have come to see the positives that a synchronised world economic recovery and the digital revolution can bring. Commentators are becoming more optimistic about growth prospects. Nasdaq and the fund’s newer positions in cyber and robotics have made progress as more investors ask if they have enough exposure to the new and exciting.

It is getting more difficult to find good value as the markets rise, but shares still look cheaper than bonds. Interest rates languish at low levels and most of the main central banks keep them nailed to the floor. Only the US edges them upwards in ways that are heavily trailed and accepted.

I have decided to shift a bit more into Hong Kong and the wider Far East. The lively entrepots and financial centres of Asia should do well out of the rising tide of world trade, deal making and footloose money. They have not yet reached the same record highs as much else of the world has done, for no very good reason. The FT fund’s investment in Taiwan has been a good performer this year, as more people have decided to run a bit more risk with higher Asian exposures.

Closer to home, one of the interesting features of European politics has been the collapse of the vote share of the two main traditional parties of centre right and centre left. This has been commonplace where unemployment is high, growth sluggish and budget cuts are the order of the day.

The public have become frustrated by austerity policies in several European countries. They tried out both the traditional parties in office, but found they could not change the basic economic approach — so both parties got damaged. This was at its most extreme in Greece where Syriza took over from the old parties because the public was angry at its inability to alter policy and improve the Greek economy.

The same tide has swept into Spain, Portugal and even the Netherlands leading to weak coalition governments. In France, the new president resigned from the socialist party to form his own new movement. The old parties have been trounced. Germany avoided some of the meltdown as the main country that benefited from the euro instead of finding the disciplines unhelpful and damaging — but still ended up with the need for a grand coalition of the two main parties to form a government.

The UK is different. Not in the currency union, it can still change its monetary and fiscal policies through domestic political action if it wishes. The two main parties of the 20th century saw their combined vote share surge from 67 per cent in 2015 to 82 per cent at last week’s general election. Voters responded to the very real differences in approach set out, and decided to exercise choice between them.

Meanwhile in parts of the eurozone still struggling with high unemployment, budget cuts and large deficits, politics remains splintered with voters backing various new parties in Spain, Italy, Portugal, Greece and elsewhere, resulting in shifting multi-party coalitions.

The last serious political risk in this year of European alarms lies in Italy. As in France and the Netherlands, the euro will be on the ballot paper when Italy does go to the polls. The Northern League, Five Star Movement, Forza Italia and the Brothers of Italy all oppose Italian membership of the single currency. Between them, they have well over 50 per cent of the vote, but markets doubt their ability to translate this into control of government and passage of referendum legislation. Time will tell.

The curious thing about market commentators and many institutional investors is that they become very political in favour of the establishments and the euro. I see the role of the investor commentator as being to describe and predict, but not to get emotionally involved in the political arguments in so many countries struggling with the euro scheme.

The many critics of the euro from parties to the right and left around the EU point to wider problems of unemployment, budget cuts, lack of growth and issues over accountability. The challenger parties are not taken seriously by many in the markets, who wish to see them lose elections because they fear break up of the single currency.

The eurozone is still arguing over how much money it should send from rich to poor areas, and on what basis. It has survived only because it has allowed massive transfers through the European Central Bank which have prevented worse austerity and cash shortages in the deficit countries.

Today, there is a bit more cash around and a bit more growth in the eurozone as a result. This means the political tensions are reducing somewhat. There is still, however, a case that the EU needs either to complete a proper transfer and political union to back up the euro in the weakest parts, or there needs to be some shedding of poorer areas from the current tough disciplines of the single currency. That will be a story for markets another day.

In the meantime, it seems we can enjoy the ride as investors with too much cash throw a bit more of their caution to the winds. I stand ready to take cover if some unexpected bad news does show up that does have the power to damage shares.

John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. john.redwood@ft.com

The Redwood fund
Asset Percentage
Cash Account [GBP] 0.2
db x-trackers MSCI Taiwan ETF 2.0
db x-trackers S&P 500 UCITS ETF (DR) 2C (GBP Hedged) 8.9
ETF Securities ROBO Global Robotics and Automation GO UCITS ETF 2.7
ETFS ISE Cyber Security ETF 2.5
HSBC MSCI AC Far East ex Japan ETF 1.6
HSBC MSCI China ETF 1.6
HSBC MSCI Emerging Mkts Far East ETF 2.8
iShares Core MSCI Emerging Markets IMI 5.4
iShares FTSE EPRA/NAREIT Asia Property 2.1
iShares FTSE EPRA/NAREIT UK Property 3.0
iShares GBP Corporate Bond 0-5 ETF 12.8
iShares Global High Yield Corp Bond GBP Hedged ETF 8.7
iShares Global Inflation Linked Government Bond ETF 4.0
iShares MSCI World Monthly Sterling Hedged 9.9
iShares Nasdaq 100 ETF 9.2
L&G All Stocks Index-Linked Gilt Index I Acc 7.9
L&G Short Dated £ Corp Bond Index I Acc 5.2
Lyxor JPX NIKKEI 400 GBP Hedged ETF 3.9
UBS CMCI Composite UCITS ETF A-acc 2.4
Vanguard FTSE 250 ETF 3.1
Source: Charles Stanley Pan Asset