Image of the Coutts logo

If 2016 has highlighted one thing, it is that politics can take us by surprise. While these unexpected events can spook the markets, sound investment principles will protect investors from panic moves.

A year of surprises

Politics has been hard for investors to ignore in 2016. The confident predictions of pollsters and the received political wisdom were wrong-footed first by the result of the UK’s referendum on membership of the EU and then by the victory of Donald Trump in the US presidential election.

As we head into 2017, pundits are eyeing upcoming elections in Holland in March, in France in May, and the German federal election due later in the year, and wondering what further surprises may be in store. 

A week may be a long time in politics, as Harold Wilson famously observed, but it is a very short time in investment

Looking past the short-term froth

A week may be a long time in politics, as Harold Wilson famously observed, but it is a very short time in investment. At Coutts, we focus on macro-economic trends that tend to be driven by deeper forces than short-term political results. While changes in the UK’s relationship with Europe will undoubtedly have an effect on the short-term results of companies, we think those that are positioned to profit from large scale changes could do well.

As long-term investors, we seek to profit from these long-term trends in a considered way. A good business with a product people want will tend to do well regardless of the political movements around them. Undervalued markets have a tendency to spring back over time and investors that hold their nerve do well when they do.

Another way to protect portfolios from political risks is through diversification – not putting all your eggs in one basket. By holding a range of securities, in different territories, a portfolio can be positioned to escape some of the negative consequences of political events. By the same token, it means that portfolios are positioned to take advantage of growth opportunities wherever they should occur.

The past is no guide to the future

As the EU referendum result and Trump’s victory show, trying to second guess political outcomes is not only difficult but very risky. Making a large bet on these results and calling it wrong could well have resulted in substantial losses.

In addition, the after effects of these results can be counter-intuitive. After the EU referendum result, the right tactic was not to sell equities, but to buy them – the FTSE 100 fell sharply immediately after the vote, as investors sold in a panic, but quickly bounced back and has since risen higher than it was before the referendum. Similarly, the FTSE 250 also fell and while it was slower to bounce back has since recouped all its losses.

28-12-16-chart-1

The market reaction after the victory of Mr Trump was similar, with initial falls in stock markets soon being negated by steady rises that have seen the Dow Jones and S&P 500 hit record levels.

This is not to say that politics can have no effect on markets. Before the US election, US healthcare sold off on the expectation of a Clinton victory after she made it clear that she would take steps to reduce drugs prices and extend Obama care.

As a result, we took a modest position in US healthcare as we felt that whoever won the election markets had over-sold a sector that still offered solid profitability, particularly given the longer-term trend of the aging US population. Trump’s victory saw healthcare rebound substantially, but our decision to invest was not based on the likelihood of who would win – it was based on sound fundamental analysis and a longer-term view that didn’t depend on any particular result in the election.

Sound investment principles can protect investors from investment risk caused by short-term political volatility. Keeping our eye on the deeper macro-economic trends helps us find markets that will reward investors in the long-term. A portfolio that is diversified across territories and asset types means that investors will never be entirely exposed to a single source of risk, nor will they miss out on growth opportunities when they arise. 

IMPORTANT INFORMATION

This webpage is produced by Coutts for information purposes only and for the sole use of the recipient and may not be reproduced in part or full without the prior permission of Coutts.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Past performance should not be taken as a guide to future performance.

In the case of some investments, they may be illiquid and there may be no recognised market for them and it may therefore be difficult for you to deal in them or obtain reliable information about their value or the extent of the risks to which they are exposed. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Investments in emerging markets are subject to certain special risks, which include, for example, a certain degree of political instability, relatively unpredictable financial market trends and economic growth patterns, a financial market that is still in the development stage and a weak economy.

The information in this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.

The information in this webpage is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgment as at the date of issue and is subject to change without notice. The analysis contained in this document has been procured, and may have been acted upon, by Coutts and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such information, opinions and analysis.

This document has been produced by Financial Advice & Investment Solutions at Coutts and does not constitute investment research. Neither this document nor any copy thereof may be sent to or taken into the United States or distributed in the United States or to a US person. In certain other jurisdictions, the distribution may be restricted by local law or regulation.

Wealth division of Royal Bank of Scotland Group.

Coutts & Co. Registered in England No. 36695. Registered office 440 Strand, London WC2R 0QS. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Become a client

When you become a client of Coutts, you will be part of an exclusive network.

BAC_link_mobile
Read more »
  • A Strong Quarter For Coutts Investments

    • Investments
    • Insight
    • Coutts Investments
    20 Apr 2017
    A Strong Quarter For Coutts Investments Coutts investment strategies delivered top-quartile performance in the first few months of the year. In this video, Monique Wong and Alan Higgins reflect on the drivers of investment performance in the Q1 2017.
  • In Sickness And In Health

    • Investments
    • Insight
    • Coutts Investments
    19 Apr 2017
    In Sickness And In Health Coutts explores the long-term investment opportunities offered by the healthcare sector as a shift in demographic trends and technology growth impacts markets
  • What The Snap Election Means For Investments

    • Investments
    • Insight
    • Coutts Investments
    18 Apr 2017
    What The Snap Election Means For Investments Sterling responded positively to Theresa May’s announcement of a snap election for 8 June. While short-term volatility is likely, in our view the long-term investment picture is unchanged.