Written by Chris Ayton
Last week fixed income markets witnessed a continuation of the selloff we have seen over the course of this month, with this sell-down largely focused on high-quality longer-dated government bonds which are sensitive to interest rates. Equity markets also became involved in the selling but are still mostly positive for the month to date in GBP terms due to a decrease in the value of Sterling, particularly versus the US Dollar.
The prevailing narrative around why fixed income markets have been selling off has been centred around the rapidly approaching US election and the growing view in betting markets that Trump’s chances of victory have been increasing. While we know betting markets often don’t reflect the eventual outcome of elections, we are also naturally sceptical about investment analysis centred around politics, particularly simplistic narratives such as the “Trump Trade” or “Harris Trade” propagated by investment banks who are in the business of generating revenues from trading and hedging activity around events.
We think this view is validated by past events, such as the aftermath of the 2016 US election. In the lead-up to that event, the popular narrative was that Hilary Clinton was the “status quo” candidate and that a victory for Trump would be a “risk-off” event which would be terrible for stocks. The exact opposite transpired. While there was a sharp drop in S&P 500 futures overnight as more and more states reported and a Trump victory became likely, by the time the market closed the day after the election, the S&P 500 index was up.
There has also been a great focus on the economic impact of Trump’s promise of much higher tariffs on imports from China and elsewhere. The conventional wisdom in much of the mainstream press is that tariffs immediately result in higher prices so they must be inflationary. However, we think this is quite lazy, headline-grabbing reporting as there is a wealth of research from groups such as the International Monetary Fund that shows what the medium-term effects of tariffs and less free trade tend to be; lower output, lower consumption, reduced spending power, higher unemployment and exchange rate appreciation, all of which are deflationary forces. In effect, the negative ultimate impact of tariffs on economic growth outweighs the immediate one-off impact on prices.
Elsewhere, in its worst result since 2009, Japan’s ruling Liberal Democratic Party (LDP) lost its parliamentary majority in the lower house elections over the weekend. This leaves the LDP desperately scrambling for new coalition partners to form a government and creates increased policy uncertainty and meaningful question marks over Prime Minister Ishiba’s future, less than a month after coming into office.
This reaffirms why we believe trying to formulate a short-term investment view based on politics and expected policies is a flawed strategy. Maintaining a diversified portfolio and staying invested, on the other hand, is a proven investment strategy that has been enduring over many decades and through many political regimes. That will continue to be the strategy employed within the YOU Asset Management portfolios.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th October 2024.
© 2024 YOU Asset Management. All rights reserved.