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Politics are overblown as markets carry on

Kevin Gardiner, Rothschild Wealth Management’s London-based managing director and global investment strategist, said history shows key geopolitical events do not necessarily translate to market risk.
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“The clichés and caricatures that people have in mind when they write about and talk about politics and how it affects markets sometimes can be a little bit misleading,” Gardiner said during a media briefing in Hong Kong on Monday.

For example, Gardiner believes Brexit won’t damage the UK economy – “at least not in a way that is very visible”.

He said that a hard Brexit, which involves the UK giving up full access to the European Union’s single market, is more likely to happen than a soft Brexit. According to him, it will be difficult to see how the UK can stay in a single market if it is also trying to tighten its immigration controls.

“But even if there’s a hard Brexit, UK and EU businesses will continue, partly because tariffs these days are much smaller than they used to be and the UK economy is stronger than its used to be when the European Union was put together,” he said.

Personally, he prefers the UK remain in the EU, acknowledging that Brexit would be bad for business. “But it’s not catastrophically bad.”

With President Trump, Gardiner said it is possible for investors to be constructive with global capital markets even if the US has a “rather unusual president in the White House.

“When you’re looking at US policy toward the world as a whole, you can’t just look at it in isolation. You have to take into account the responses of US [trading] partners, and that is tremendously important when it comes to trade and to protectionism,” he said.

For example, China, which a large US trade partner, may respond constructively to possible protectionist policies in a way that people are not anticipating.

In addition, President Trump’s policy rhetoric does not only include protectionism. He’s also talking about lowering taxes and deregulation, which are good for investors, Gardiner said. 

Overstated political risk

To illustrate how political risk can be overstated, Gardiner presented a graph showing 23 geopolitical, economic and financial shocks since 1929.

He said the events show a widely divergent impact on the market (measured by the S&P 500). Moreover, markets typically recovered from geoplitical events relatively fast.

The median drawdown for all these events was -20% while the median number of days for the market to recover was around 80.


 Source: Rothschild Wealth Management

In addition, the immediate market responses to some major geopolitical events, such as the Cuban missile crisis and the invasion of Iraq, were relatively muted and short-lived, Gardiner said.

He is not alone with his views on geopolitical risks. Luca Paolini, Pictet Asset Management’s London-based chief strategist, said previously that investors should not overestimate the short-term impact of the European elections. To support that point, he cited the Brexit vote and the US elections last year, which caused immediate market volatility which subsided within days.

Bill Maldonado, HSBC Global Asset Management’s APAC chief investment officer, said in a previous presentation that investors should not be overconcerned about geopolitical events. 

“Although we worry about geopolitical events, in the long run, they have much less of an impact than you would have imagined. The market is pretty good at absorbing them,” he said.

Upbeat on growth assets 

Given his views on geopolitical risks, Gardiner suggests that investors should remain invested in growth-related assets, such as equities, especially since the global economy has become stronger.

In terms of sectors, Gardiner likes financials as they could benefit from improving loan growth and rising interest rates.

He also likes the technology sector because it looks inexpensive, he said. The exception is companies that have a massive dependence on advertising revenue, such as social media companies.

He is less positive on sectors that act as bond proxies, such as utilities, telecommunications and consumer staples. However, he said that investors should not underweight consumer staples companies for the long-term. “There are some fantastic companies out there.”

In terms of geographic markets, he likes emerging Asia as most of the world’s population lives in the region.

“If you believe that markets will continue to liberalise, which I do, then over time, most of the world’s economy and capital markets will be in Asia,” he said.

“On a long-term basis, you need a very good argument for not having a positive view in Asia.”


Part of the Mark Allen Group.