Belfast Telegraph

Markets' reaction to a very turbulent year full of many surprises


By Jamesina Doble, director of investment management, Johnston Campbell

The political world has been on a roller coaster over the last year or more - and there's no sign of it slowing down. The question is: are investors navigating similar levels of instability or are the markets bearing up despite the storms raging all around?

We've had the shock Brexit result, followed by a Trump victory in the US presidential election that caught everyone napping. Then, just when it seemed we were strapped into the inevitability of a slow grind towards Brexit, Theresa May's ill-considered decision to call a snap Westminster election provided another perfect illustration of the law of unintended consequences.

Instead of shoring up her Brexit strategy with an unassailable mandate, the election left an unstable government teetering just when stability is most needed and forcing it into a deeply unpopular agreement with the DUP.

With all the old certainties turned on their heads, you might expect to find investors navigating their way through similar levels of turbulence.

What we've found in the past is that political instability is generally not good for markets, increasing volatility as investors grow skittish. But this time, that perceived wisdom has been overturned - and the market reaction over the year has diverged substantially from what might have been predicted.

We've seen some unexpected market trends over the past year - for example, while US stocks took a tumble during Trump's late-night surprise victory on November 8, they made a quick recovery, with all major US indexes setting all-time highs in the following weeks.

Meanwhile, ahead of the Brexit vote, the International Monetary Fund was forecasting a stock market crash and a steep fall in house prices in the event of a Leave result.

While the panic in the wake of that Leave result did wipe a staggering $2trn off global markets, that market correction proved to be short-lived.

While the pound moved lower, the UK stock market, in particular, provided more resilient than anticipated, thanks in part to the investor appetite for UK stock with foreign earnings.

Meanwhile, the Conservatives' minority result in the Westminster took the industry by surprise, yet market reaction remained relatively subdued thanks to a Tory government remaining at the helm and a hard Brexit looking less likely.

Investors sat tight, knowing there would be no dramatic changes in domestic policy as there might have been under a new Labour government.

The result played out through currency movement, with the pound weakening against the euro and the dollar, but in turn this provided a boost to the FTSE100.

More than 70% of the index is made up of overseas earners listed in the UK who tend to benefit from earnings in currencies that are stronger than the pound, so a weakened currency provided them with a boost.

This explains why there has been so little market movement despite an apparent increase in uncertainty, although the FTSE250, a better barometer of UK sentiment, was trading lower in the wake of the Westminster election.

Fears of the Brexit result exerting a domino effect to deliver populist votes in other European elections have not been realised, leading to a steadying political situation on the continent and global political uncertainty has also decreased.

However, while market turbulence has been lower than expected, all is not rosy for the UK economy, with Article 50 negotiations casting a shadow over companies focused on the domestic market and chief financial officers admitting to being increasingly pessimistic about negative long-term effects from Brexit.

  • Jamesina Doble is director of investment management with Belfast wealth management company Johnston Campbell

Belfast Telegraph