Political Risk – Not A Smooth Operator!

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Investments – The Risks and The Rewards
February 7, 2017
political risk

One of the most dominant factors in stock market performance during 2016 was the impact of political outcomes such as the Brexit referendum and the US presidential election.

If we examine equity markets performance charts for 2016 the result of the UK Brexit referendum in June is pronounced, especially in UK and European Markets. The result caused an immediate drop in the UK equity market with the FTSE 100 Index falling 12% in the days after the Brexit result. However, the index recovered quickly and by the middle of July, the FTSE index had almost recovered to the value it was pre the Brexit referendum.

 An even more pronounced reaction was the US presidential election result in early November. US equity markets grew strongly following the result. The S&P 500 index rose over 2% in one day, almost 6% within the first week and had risen by 10% by the end of 2016. In fact most of the growth in equity markets in 2016 occurred following the US presidential election result. This is mostly based on the belief that the US administration will be pro US business, which will have a positive impact on US quoted companies. Time will tell if the US administration’s programme will be executed as planned.

 So will 2017 be any smoother for equity investors?

As the tide of nationalism rises across Europe, elections in the Netherlands, France and Germany will likely result in market volatility. The economic impact of Brexit is still an unknown road for the UK. US foreign policy and economic policy will no doubt set the global political tone for 2017.

Investors should continue to expect equity market volatility and seek portfolio diversification by investing in as broad a range of assets as possible. Commercial property funds should be considered as a non-correlated asset to equities. Property funds can help play a significant role in providing asset diversification and have potential for moderate investment returns over the medium term. Other asset classes such as short dated bonds and alternatives such as gold should also be considered for creating portfolio diversification.

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