Navigating financial markets: how to weather political uncertainty

The global economy is still fundamentally in good shape. Nevertheless, that there are political risks in the world today which investors would be wise to note.

Catching up on the latest geopolitical developments has become routine for many us, with each day bringing a new assortment of concerning headlines and certain themes becoming regular features on the front pages: Brexit, trade tensions between the US and China and political developments in Argentina, to name just a few. This constant flow of troubling news can unnerve investors. However, we maintain our view that the global economy is still fundamentally in good shape and that the economic expansion has further to go. Nevertheless, we acknowledge that there are political risks in the world today which investors would be wise to note and take into consideration when managing their portfolios.

Brexit – absence of clarity, still
The Brexit saga has been a source of huge uncertainty – for businesses in the UK as well as companies in the other 27 EU member nations, who are all waiting for clarification on the trading rules that will apply post Brexit. Boris Johnson’s first few weeks as UK Prime Minister have been eventful. With such a range of views among the Members of Parliament and a distinct lack of any inclination to compromise, moving forward on the issue of Brexit looks likely to continue to be a challenge. A general election in the not too distant future is now extremely likely; perhaps a change in the composition of Parliament will enable progress to be made. While our base case scenario is that either a deal between the UK and the EU will be reached or there will ultimately be no Brexit at all, investors would be wise to consider the consequences of a no-deal scenario and position their portfolio accordingly.

Minimise the risks but allow uncertainty to uncover opportunities.

US/China trade tensions rumble on
Meanwhile, uncertainty as a result of the trade tensions between the US and China lingers on. As of September 2019, this trade conflict is roughly 18 months old. Escalations in the tensions are closely followed by de-escalations and so it continues, and as an agreement between the US and China is not expected in the near-term, this particular source of uncertainty is not likely to fade anytime soon. Thus, while there are currently, in our view, rational arguments in favour of staying invested, thinking about the possible outcomes of this trade conflict and their likely consequences would be prudent.
 
Argentina – elections approaching
Argentinian president, Mauricio Macri, was emphatically defeated by the opposition led by Alberto Fernandez in the country’s primary elections in August. The first round of the general elections in Argentina is to be held on 27th October - the uncertainty regarding the outcome of these elections is a further risk to be taken into account by investors.

That’s not all…
Other key events that may be sources of uncertainty and hence lead to some volatility include the federal elections in both Switzerland and Canada, which are scheduled to take place in late October. Then, the 31st October should not only be Brexit day but will also be Mario Draghi’s last day as the President of the European Central Bank. Looking further ahead, local elections take place in the UK in May 2020 and the US presidential elections are to be held on 3rd November 2020.

Key takeaways

  • While we believe the global growth environment is still attractive, considering the consequences of future political events is advisable.
  • With so many cogs playing their part in the extent to which the wheel keeps turning, it is, alas, not possible to say with certainty how the global economy will develop in the coming months. 
  • For investors, active management can play an important role and a flexible approach is crucial. 
  • Based on analysis of the currently available information, investors can position their portfolios such that the risk of any external shocks having a detrimental impact on the value of their investments is minimised.

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