Politics and portfolios: how investors are adapting to a new normal
Politics is moving markets like never before. So how are fund managers adjusting?
10 Oct 2018
Unstructured Learning Time
Recently investors have grown accustomed to political issues such as trade wars and Brexit moving markets. But it has not always been this way.
“Fund managers never used to have to think about politics when investing,” said Charles Prideaux, Head of Product and Solutions at Schroders. “That’s changed. We’re seeing political disruption affecting markets and that’s not going away.”
This was a major theme on the agenda at the recent Schroders Investment Conference in Venice, where a panel of fund managers talked about how an active approach can help navigate markets fraught with political risks.
Global equities – Big business is alert to the hostile rhetoric
The panel found that the rise of populism and its consequences are forcing firms to change the way they act.
“Big business is very alert to the fact it is facing increasingly hostile political and media rhetoric. This is raising regulatory risks and the risk of damaging headlines across a range of sectors from big tech to autos,” said global equities fund manager Katherine Davidson.
“It’s creating an environment where companies need to be more aware of being good corporate citizens and of managing their businesses in the interests of a wider group of stakeholders. This may seem at odds with the interests of shareholders in the short-term, but in the longer-term should be mutually reinforcing; a 'corporate karma' that’s beneficial.”
Politics is making this focus on the longer-term essential, Davidson thinks.
“The more volatile the short term becomes, the more important it is to be a long-term shareholder. It becomes challenging or even futile to try to forecast quarterly earnings given the amount of noise, so you need to find companies that can ride out the storm.
“Hence, we’re spending more time thinking about the resilience and durability of business models and companies’ ability to adapt, survive and thrive in a changing environment. We look for management teams who understand this; who are open to disruption and innovation and are appropriately incentivised to think about the long-term.”
China A-shares – Political assistance can see economy emerge stronger
The Chinese market has arguably always been highly driven by domestic politics, given the amount of state control in the economy and the significant presence of state-owned enterprises in the stock market.
Now, amid the escalating trade war with the US, foreign politicians are also having an effect in the country. Indeed, the China A-share market is one of the worst performers within emerging markets this year (down 21% year-to-date as at 3 October), due in large part to the trade dispute with the US.
“We are definitely trying to avoid companies which have a large potential impact from trade with the US,” said Jack Lee, Head of China A-Share Research. “Surprisingly, there aren’t that many companies with a large US export exposure, and past experiences in previous trade conflicts have shown that many such companies would eventually shift production overseas to avoid tariffs.”
“It’s the indirect impact that is harder to calculate and avoid. The loss of business and jobs and the resulting cost escalation that leads to businesses closing would all feed into the economic slowdown and into various parts of the economy.”
Lee thinks that a lot of bad news has already been priced into the China A-share market and that, with some political assistance, the economy can emerge stronger from the current malaise.
“We could expect profound structural reforms coming out from the government to weather this down-cycle,” Lee said.
“After all, China is a large, diverse economy with a huge domestic consumption base and a productive workforce. We are confident that many good companies will continue to prosper over time. Currently, everything has come down in price so it’s an interesting time to pick up companies that we believe have been oversold”.
Please be aware changes in China's political, legal, economic or tax policies could cause losses.
Multi-asset – Fundamentals, not politics
Multi-asset fund manager Alastair Baker predicts that an active and global approach will be beneficial, because there will be “greater dispersion across the performance of companies and countries as they adapt to the breakdown of globalisation.”
It’s best to focus on fundamentals, not politics, Baker believes.
“We would never buy any asset based on a view on politics; we have no edge and can’t predict the electorate,” he said. “But we do analyse the potential range of outcomes. We factor in what we believe to be priced into assets and buy cheap hedges to mitigate against the bad outcomes. Typically we want to invest in areas robust or cheap enough to weather political gyrations. Valuations and fundamentals continue to be our anchor in turbulent waters.”
Baker said that political disruptions have not derailed global growth just yet, although he has been reducing his risk exposure.
“The music is still playing for global growth momentum. We’re dancing closer to the exit, but we’re still dancing.”
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.