December-January 2017

OPINION: A bloody nose

Are we getting used to seismic political events? It begins to seem so. The ‘no’ result in the Italian referendum on December 4 wasn’t seismic exactly, but the reaction to it from investors was definitely more muted than it might have been had they not already had to metabolise Brexit and president-elect Trump.

All the big asset management houses and research companies dutifully churned out commentaries, but there was a kind of weariness to them. Or, to put it as Edison Investment Research did: “Markets not in turmoil. Investors who panic-sold after Trump and Brexit have been reconditioned to not immediately re-price risk on the back of specific political events.” A bit long-winded, yes. But it hits the nail on the head. Investors have got used to big political car crashes and are no longer running quite so fast to gawp at the casualties.

“You can’t be given a bloody nose twice,” says Alastair George, chief strategist at Edison. “Populism is now an accepted part of the investment landscape. If Brexit was the EU’s bloody nose and the blow from the Italian referendum added to the pain, the market action today demonstrates the shock value for investors has now diminished.”

Of course, you could argue that reaction to the Italian referendum result was dampened by the contrasting news from the other election the same weekend: that of Austria’s president. Alexander van der Bellen, an independent candidate and former leader of the Green Party, beat the right-wing populist candidate, Norbert Hofer, by a decisive margin. One of Mr Van der Bellen’s supporters held a placard that read ‘Gott sei Dank’ (Thank God) as the result came in, and that’s how some investors felt too.

“To be honest, we’d been struggling to understand why the media and some market commentators had been making quite so much of this election as a potential market-moving event given the largely ceremonial status of Austria’s president,” says Jeff Taylor, head of European equities at Invesco Perpetual. “However, as another reminder that political extremism is not guaranteed to win every time Europeans go to the polls, we’ll take it.”

That comment provides an insight into just how unwelcome the wave of victories by populist politicians in developed countries has been with most professional investors. Nonetheless, Alastair George is right when he says that they are getting used to this new version of the New Normal, even although, as Monica Defend and Cosimo Marasciulo of Pioneer Investments point out in their commentary on the result, it is happening at a time when “central banks are passing the relay baton back to governments in an effort to complement monetary policy stimulus with more expansionary fiscal policies and structural reforms”.

Of course, there is no reason to assume that the ‘no’ vote in Italy means Marine Le Pen will win in France next year or Geert Wilders in the Netherlands. “Populism and rising social discontent remain the key risks, but we believe that expecting a materialisation of these risks on the back of the no victory is overstated,” say Defend and Marasciulo.

What is different compared to this time last year is that we will not be truly shocked if they do win. What would truly shock us now? Maybe Microsoft going bust. Or a counter-revolution in China. That is where we’re at: developed markets are no longer a bastion of stability. We must look to corporates and emerging markets for that.

“Developed market investors take for granted sophisticated and optimal (in a game theoretic sense) diplomatic and trade policy initiatives,” says Alastair George, suggesting that president-elect Trump’s “disconcerting” policy manoeuvres in respect of Taiwan and Pakistan may spell an end to this unappreciated nirvana.

Investors will no doubt muddle through, finding the pockets of opportunity. In the meantime, it’s perhaps worth remembering you actually can get a bloody nose twice.

Fiona Rintoul is editorial director at Fudns Europe

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