The last 12 months proved to be a period where it would have been advisable to observe the turmoil in world politics with detached interest but resist any urge to alter ones investment portfolio in response. Below, we discuss how we in fact reacted to such extraordinary political developments, and specifically how we changed our recommended asset allocations. We also consider the performance of the model against both its peer group and industry comparators.
Prior knowledge of the UK electorate’s intention to vote for Brexit in mid-2016 but deny the Conservatives a ‘strong and stable’ majority in mid-2017, taken together with Donald Trump’s unlikely but nevertheless successful bid for the US presidency, would have tempted all but the most hardened investor to pack up his or her portfolio, and head for the safety of cash or government bonds until the dust settled. While understandable, such action would have led such an investor to miss a very good year for markets. For sterling-based portfolios one explanation for the apparent disconnect between politics and strength in markets lies in developments in foreign exchange markets; gains for UK-based investors were to a degree driven by the sharp fall in the pound in the wake of the referendum result, boosting both the value of holdings of overseas assets and the value of the foreign earnings of UK listed companies. More widely, and perhaps of greater importance, the explanation for strong markets is to be found in an improving global economic outlook. This was augmented by the election of Donald Trump which further fuelled optimism on growth and profits, as investors decided to ignore Trump’s many anti-market policies and focus instead on promises to boost growth through tax cuts and infrastructure spending.
Thus somewhat surprisingly, the global economy snapped into a higher gear from mid-2016 onwards, underpinning higher share prices so that 2016 turned out to be the best year for equity markets since 2013. The first six months of 2017 have followed in a similar vein. From the perspective of mid-2016, however, market strength in the aftermath of the Brexit vote gave us what we considered at the time to be an opportunity to book some profits from equities. Our rationale was that economies and investors would at some point have to confront the less positive sides of both Brexit and Donald Trump. While this is perhaps beginning to take place now, markets have not retraced.
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