Political shocks by their nature provoke strong reactions from investment markets.
Uncertainty, courtesy of political or regulatory risk, feeds market volatility as investors – professional and individual – try to decode the meaning of the changing environment and how to value assets accordingly.
Because the outcome was unexpected the Brexit vote sent shockwaves through global markets with the ongoing political leadership instability in the UK providing daily – if not hourly – instalments to feed the global media interest.
A strong tone that has punctuated public commentary this year has been one of upheaval: voters are unhappy with the status quo – whether that’s in the US, Britain or any number of developed nations.
As Vanguard’s global chief economist Joe Davis said recently: "What we saw recently [in the UK] is just confirmation of some longer term trends, some of them economic in nature, which I think are leading to some change across the world in the political arena."
By comparison our own federal election process appears almost reassuringly normal – despite the closeness of the result bringing its own form of uncertainty.
Investors will have no shortage of geo-political issues to occupy their attention in the coming months, if not years.
When you look forward the US presidential campaign will provide stiff competition to Brexit developments for investor attention though the second half of the year.
And we should expect some bumps and surprises as the unparalleled process of the UK exiting the EU is negotiated.
Now that we have got over the initial shock factor of the Brexit vote three lessons for investors have stood out.
The first is the overriding value of having a written financial plan.
At times of market stress and/or crisis when the market drama and sense of urgency is clamouring for your attention and driving a strong sense of needing to do something….
Being able to pull out your personal financial plan, refer to the goals that have been captured in calmer times and check whether you are on track can be a powerful antidote to the sense of market turmoil.
The second is the need to be globally diversified. As Vanguard’s chief economist in Europe, Peter Westaway, says investors who were overly concentrated on UK assets probably had the most regret in the immediate fallout from the vote.
"We also need to bear in mind that Brexit will have global effects, so merely moving out of UK assets might not achieve the desired result,"Westaway says. "While the short-term impact of the vote is likely to disrupt the markets, it’s less clear how significant this will be for a long-term Australian investor holding a well-diversified global portfolio," Westaway says.
The third is the value of taking a long-term perspective. A week out from the vote and markets have settled somewhat but clearly the uncertainly level will be high potentially for several years so we should expect other bumps and setbacks to impact markets.
The good news is that since the result of the vote became public, investors largely seem to have stayed on course.
Trading volumes for Vanguard ETFs were significantly higher on Friday 24 June, the day the Brexit votes were counted and results filtered through to media, but the data showed more buying activity than selling. By Monday ETF trading volumes were back to within normal ranges.
And now, as our attention has turned back to political developments at home, it looks as though we will have possibly a week or two of uncertainty as we await a final result of the Federal election outcome.
The final outcome of the Federal election and what our new government might look like is clearly important but it is worth remembering that while political shocks can affect markets, they shouldn’t drive your long-term investment plan.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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