28 September 2016

Calm before the storm?

The US Presidential election race is well and truly under way.


We recently saw the first of the debates between the rival candidates. On the face of it, Hilary Clinton came out on top, but with several weeks to go before polling day, there is plenty of time for Donald Trump to even the position. The difference between the politically savvy la wyer and the populist salesman were striking. Markets will doubtless have to get used to their fluctuating fortunes.

What with the uncertainty created by an election in the world’s largest economy and the various noises coming out of those involved in the upcoming Brexit negotiations, it is a wonder markets are as calm as they are. Overall markets have held up well, but with a few unsettling spasms as investors take fright. Sterling, on the other hand, has been troubled by talks of a hard exit from the European Union, with Mario Draghi, boss of the European Central Bank, warning that there could be no favours granted. Well, he would say that wouldn’t he? But it’s far too early to tell what Brexit might look like.

The talks over our ongoing relationship with Europe – and with how we trade with the rest of the world, for that matter – are likely to run for several years, which makes it hard to see how shares can make much ground. After all, investors do not like uncertainty – and there is plenty of that around right now. But then, against all expectations, markets rallied after the initial knee jerk downward spike came after our decision to leave the EU, so popular wisdom is not always right.

The international nature of our leading companies that go to make up the FTSE 100 Share Index has everything to do with the relative strength of our stock market. A lower pound means the profits they earn abroad are worth more in sterling terms. It should help our domestic exporters, too. In the end, what is happening elsewhere in the world is more likely to govern how shares behave and there isn’t too much serendipity around there either.

The exit discussions and, closer in terms of time, the US elections could hold markets back in the shorter term. Certainly, we are likely to be buffeted by rumour and speculation on the Brexit front, while a surprise result in the US Presidential election could see some investors diving for cover. Roll on next year, when hopefully we will see the back of one uncertainty, though with French and German elections due, even then we may not see a smooth path.


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