Monday 22 October 2018

Time for investors to brace themselves for unsettled conditions


There are some clouds for investors to fret over. Stock image
There are some clouds for investors to fret over. Stock image

Eoghain Murphy

Investors have not had to look far for things to worry about in the last decade. From a collapsing economy and banking system, to regularly convulsing electorates, to the steep losses on world stock markets in recent days, there has been plenty to be uneasy about.

The risk outlook (that is, the chances of encountering risks in the future) is often best characterised as an iceberg. Most years, it is not the things you think you can see that provide investors with the jolts.

Those worrying about the apparent lack of visible risks can take a little succour from the idea that the risk outlook appears to us much the same as it always does: mostly unknowable from our vantage point.

Nonetheless, there are some clouds for investors to fret over. The Italians will trudge to the polls on March 4 to no doubt express their dissatisfaction with what remains the most worrying of the major European economies. The likely best case is the ever-familiar political stalemate and the worst is some backtracking on the important labour market and pension reforms enacted under two former Italian prime ministers, Mario Monti and Matteo Renzi. Nonetheless, for investors with fingers already hovering over the sell button, there are a couple of things to keep in mind.

First, the birth of a heterogeneous coalition is likely to be painful, but more importantly protracted. Second, even if EU-unfriendly forces were to both win the election and form a workable coalition, the constitution prohibits referendums on international treaties.

The Italian economy, beginning to enjoy the fruits of the wider European recovery, will have to get along without a strong government. However, Italians and indeed investors may not notice the difference.

In Britain, some understandably fear the collapse of Prime Minister Theresa May's government - and more elections.

Further political instability would no doubt complicate Britain's progress with disentangling itself from the EU. For investors, such turbulence would surely infect sterling and to a degree, even wider British assets. However, the British economy has proved reasonably resilient to such shocks thus far.

No list of political risks for the year ahead would be complete without a mention of the US administration. For the moment, we retain our admittedly guarded faith that constitutional safeguards and economic self-interest will continue to muzzle its least investor-friendly impulses. However, the approach of the US midterm elections, combined with low Presidential approval ratings, may be influential.

Furthermore, the recent surge in oil and wider commodity prices has coincided with inflation expectations ticking higher in the US. Persistent price acceleration may prompt the Federal Reserve to over-tighten monetary policy, bringing an end to the third-longest business cycle in US history.

None of these risks loom large enough for us to take evasive tactical action just yet. We still see that increasingly vibrant economic backdrop in the driving seat for capital markets when all is said and done. Investors should be braced for the less comfortable ride which is already beginning to materialise - and invested for further strong global economic growth as a result.

Eoghain Murphy is a director at the wealth and investment management division of Barclays in Ireland.

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