In answer I’d suggest that as investors we should be taking more care to distinguish between share price moves driven by politically motivated sentiment and those resulting from genuine performance – and recent economic data from around the world has been decent. Take Europe, for example: the political situation there may be turning ugly, but it’s still home to many strong companies, and its economies are recovering from a low base. And for all Trump’s bluster, I think his protectionist tendencies will ultimately be watered down by realpolitik. I suspect the same will happen with Brexit, because whichever side of the debate you are on, protectionism is not the purpose of leaving the EU; open trade borders are good for everyone, and especially Europe for whom the UK will always remain an important partner.
Meanwhile a return to more normal monetary policy is good news. And although interest rate decisions are not, despite suspicions, politically driven, the apparent willingness of Trump and other world leaders to flash the fiscal cash makes the job of central bankers a little easier. As investors we should look past any short-term pain and welcome this shift, because for too long savers have been unfairly punished, while investors have been forced to take ever riskier investments to offset the pain of low rates. This has distorted the price of all assets to the point where it is becoming increasingly difficult to determine whether we are paying a fair price for anything, so a change should also be good for stockpickers; the recent success of value strategies suggests this trend is already playing out (see page 34).
Yet for all the gloom, stock markets continue to scale record heights, and perhaps that is a good reason to exercise caution. Indeed, the market’s ability to put a positive spin on outcomes that had previously been billed as very bad news could in itself be interpreted as hubris commonly experienced at the end of long bull markets. High levels of mergers & acquisitions and share buybacks are also end-of-cycle indicators worth paying attention to.
I know that some investors have been cashing out for fear of what Brexit negotiations may bring. I think this is foolish: by all means sell investments if you think they are overvalued, or if you want to switch into better investments, but not in anticipation of a political failure that may or may not materialise. And if, as many suspect, the negotiations take several years, that’s several years you’ll be out of the market, when as history shows us time in the market (and reinvesting dividends) is what generates returns.
