While the investment performance tables for the end of October show very strong global investment returns for £‑Sterling based investors, the first week of November has had d a distinctly different flavour. UK investors may have suspected that the spectacular High Court ruling upset markets by creating yet more uncertainty about Britain’s Brexit path to be the cause, however, the negative momentum clearly has emanated from US politics. With the US presidential election taking place tomorrow, it was driven by the fear of a ‘President Trump’ becoming reality. Just as with the UK’s EU referendum, what many thought to be unthinkable, has over the past week become a real possibility – Donald Trump being elected US President! The FBI’s reopening of criminal investigations into Clinton’s clumsy mixing up of her private and official email accounts on her Blackberry, while secretary of state under Obama, and has cost her much of the lead over Donald Trump. Something, which the week prior seemed unimaginable.
Given Trump’s lack of governing experience and outsider status, his election would indeed mean far more uncertainty about the future direction of US policy than Hilary Clinton. Risk asset markets can’t stand uncertainty; hence the stock market falls. I believe that it is far more likely that after the initial shock that markets will refocus on the likely realities a president Trump would face. Just as president Obama was quite limited in what he was able to achieve under the constraints of Washington’s administration apparatus, so would a president Trump.
The strengthening of the US economy which was further evidenced over the past week by improving corporate profitability, rising employment, better business sentiment readings and the central bank indicating a December rate rise, is highly likely to bring market emotions quickly back to a very different reality. One of persistent, steady economic growth, which so far has withstood so many headwinds over the past years that an overpromising Donald Trump is unlikely to significantly derail it either – in the short to medium term.
Those who are fearful about the short term value development of their investment portfolios, should think back to all the doomsday market scenario predictions ahead of the Brexit referendum and take note that there is currently much less of this type of comment. Some have therefore even interpreted this pre-election stock market sell-off as a buying opportunity after having suffered from far too high cash positions since the immediate post-Brexit days.
In the UK, politics, judiciary and central bankers have done their best to compete with the noise coming from across the Atlantic. In combination they helped the battered British currency to regain some ground to the tune of around 2.5%. This surge of £-Sterling was the largest in a week since March. It showed markets’ appreciation of Mark Carney agreeing to remain governor of the Bank of England for one year longer than originally planned, not hinting at another rate cut following the MPC meeting and the High Court ruling that the Brexit referendum result could not be used by the Government to entirely side-line the elected parliament from any involvement in the process ahead. Despite all the noise to the contrary from Downing Street this ruling may have been greeted with a sigh of relief as it provides Theresa May with an excuse to triggering Article 50 later than March 2017, which might be a good idea, unless she wanted the first 6 of the 24 months of negotiation time being wasted with avoiding to become subject of the French and German election campaigns.
The slight strengthening of Sterling was by far the best news of the past week. It might well be seen as having ‘stopped the rot’ of the currency devaluation, which was beginning to become uncomfortable, given the UK’s dependency on foreign savings to finance the country’s current account deficit. It has reversed a little of the currency derived investment gains, but this would be a small price to pay if it meant that the UK can enjoy for longer the positive economic momentum the currency devaluation has brought us since the summer, without having to fear too much of a hangover from this sugar rush further down the line.