Fear, greed and hope have destroyed more portfolio value than any recession or depression we have ever been through. So we should pay attention to the three major influences that affected share valuations this week.
It’s worth noting, that while these challenges will have an immediate effect on market movements, like the volatility we saw after the EU Referendum, the impact on long term investors should be less noticeable.
We see each of the market moving stories this week as short term impact events.
The American Presidential Election
Markets across the world were as nervous about the first presidential debate broadcast on Monday night, as Hillary Clinton and Donald Trump were themselves. As a result, Monday was a difficult trading day with the FTSE index falling nearly 100 points.
Hillary Clinton’s assured performance gave the markets confidence compared to Donald Trump’s obviously unprepared act. Although it was a points win, to use a boxing analogy. Neither candidate landed a lasting blow, shares were up in early trading on Tuesday morning. The Mexican Peso was also up, although we couldn’t find any specific share to quote, we’re sure local wall builders shares were down.
Opinion polls put Hillary Clinton ahead by four points, with 41% of likely voters. But the UK’s last general election and Brexit result have taught us how fallible pollsters can be in a tight race, which the 2016 presidential election certainly is.
The impact of a Clinton win is expected to be fairly benign, with business as usual at the White House and on Capitol Hill. A Donald Trump win would be altogether different. It would a bit like the Brexit vote; a lot of noise in the papers and a market sell off. The long term outcome would take a while to unfold and, in the medium term, things would calm down pretty quickly.
Whichever candidate wins, the markets expect expansionary economic policies. That means the US is going to be spending more than it has. Either cutting taxes, spending more money or both, this will affect the bond market.
Both candidates have said they will take a more a protectionist approach to trade. Putting aside this may not be helpful for the UK’s Brexit negotiations, these are inflationary policies that also affect the bond market. So we need to be wary of US companies with lots of debt too.
You can read more about the state of the US economy from our recent article by clicking here.
Like the Prime Minister, we don’t want to provide a running commentary on every twist and turn, so it hardly seems worth mentioning. It isn’t really news, because nothing has actually changed yet.
However, what has become increasingly apparent to the City since the summer break, is fears of the so-called ‘hard’ Brexit. In particular, what is called passporting, the ability to sell financial services anywhere in the EU under a single regulatory framework.
Passports, were introduced in the early nineties to enable UK financial services firms to sell services freely across the rest of the EU and give European based companies access to the UK. This is mainly for banks, insurers and asset managers. It has been seen as instrumental in helping London to become a global financial hub. Companies from North America and Asia have chosen the City to access the rest of the EU with a UK passport.
The Financial Conduct Authority data released by the Treasury Select Committee says 5,476 UK-registered firms depend on passports to do business in the rest of the EU and another 8,008 European companies rely on passports to offer services in Britain.
It seems certain that London will take some sort of hit from Brexit, even Lloyds of London has said it is preparing for moving more of its activities to other European cities. Most UK Asset Managers already have operations in Luxembourg for tax reasons, and these could be expanded at London’s expense.
The UK banking sector contributes about £31billion annually to the UK economy. So although Treasury officials warned that a ‘hard Brexit’ could lead to at least £10billion in tax from the City being lost each year, we’re optimistic. Firstly, because we don’t think any Government will be foolish enough to negotiate away the UK’s main competitive advantage. Secondly, we believe the City will eventually weather the storm; it has seen far more challenging times before.
You can read more about making investing decisions in the light of Brexit in our recent article by clicking here.
The biggest market story of the week is in Germany. Deutsche Bank was known as Europe’s strongest financial institution. It is the most systemically important bank in Europe and what has become increasingly clear that something very nasty is developing.
Its solvency is most in doubt, which has led to Deutsche Bank’s share price collapsing to an all-time low.
The current fears started last week with a demand from the US government to pay $14bn to settle claims that it mis-sold mortgage-backed securities back in the day, when Lehman’s was still in business.
It probably won’t have to pay that much, but either way, it’s a big cheque to write and its capital reserves are under pressure.
Bailing out banks has been political suicide, as we saw in the UK in 2010. So the fear of a banking crisis were exacerbated when German Chancellor, Angela Merkel, was reported to say that the government will not help bail the bank out. This may have something to do with the general election she’s fighting next September.
Even though no one wants to cut banks any slack, there are mechanisms in place to prevent a further banking crisis and keep Deutsche solvent. The chances are that Deutsche will reach crisis point before either the German government or the European Central Bank acts to shore up its balance sheet.
The three FTSE fears we have set out here will take some weeks even months to play out. They will affect markets day to day, but as we set out in our recent investing outlook article, the outlook for global market growth is looking positive.
However, if your attitude to risk has changed, or you want to make sure your portfolio is aligned to weathering volatility, contact your adviser today.
The value of investments can go down as well as up and you may not get back the amount invested.