A dark cloud of geopolitical uncertainty hangs over the global equity markets (see our rational for investing in gold). Even if you wanted to ignore the clamor, the 24-hour news cycle makes it virtually impossible. How can investors separate relevant information from meaningless noise? Simple. Don’t mix politics and investing. Fortunately for us, 2017 provides several examples of investors potentially leaning the wrong way due to perceived political risk.
U.S. Trump Trade
S&P 500 11/1/2016 - 5/23/2017
Cabinet turnover, allegations of disclosing classified information, Syria airstrike, healthcare reform challenges, impeachment talk, Russia probe, etc. What else could we pile on? Despite all of the above, U.S. equity markets have been resilient appreciating ~14% since the election.
South Korea Impeachment
The Korea Composite Stock Price Index (KOSPI) 3/10/2017 – 5/23/2017
Former South Korean President Park Geun-hye's impeachment for taking bribes, abusing power, and corruption has her facing life in prison. Overlay this with North Korea's defiance and things have seldom been more tenuous on the Korean Peninsula, but you wouldn't know it by looking at South Korean equity market returns this spring.
BOVESPA 08/31/2016 - 5/23/2017
The Brazilian Senate impeached Brazilian President Dilma Rousseff for illegally manipulating government accounts. Only months later, current Brazilian President Michel Temer facing another impeachment controversy over bribery allegations.
European Elections + Brexit
Euro Stoxx 50 8/1/2016 - 5/23/2017
UK FTSE 8/1/2016 - 5/23/2017
Multiple elections and referendums across Europe could impact the future of the EU. So far, the populist candidates in the Netherlands and France have lost to more moderate candidates. Brexit negotiations that are hitting a rough patch as the UK and EU argue over the financial terms of the divorce. Greece is still reforming economy to comply with bailout conditions. Europe has been one of the best performing developed markets in the world...go figure*.
Historically, investors overestimate the impact of political parties, Presidents, and legislation (it doesn't matter who is in the White House). It’s reasonable to assume this premise is amplified if current government ideology conflicts with the individual investors’ political views. Even if one was to correctly forecast a political outcome, markets seldom react in a predictable manner. The globally intertwined economy is much more deep and complex than any elected government official. Mixing investing with emotionally charged politics can be hazardous to your wealth.
* Pure Portfolios has a tactical position in European equities through VGK (Vanguard ETF). Returns are quoted in U.S. Dollars.