Barclays Wealth Blog
Unpopular uprising

“The reason we have elected officials is so we don’t have to think all the time” - Homer Simpson

Didn't you get the memo?
Dutch voters seemingly misplaced the script. The synchronised rebellion against globalisation and its advocates failed to gain much purchase in Holland on the evidence of this week’s elections. Geert Wilders’ anti-EU Freedom Party (PVV) will likely be excluded from the new governing coalition, thus constraining its influence in Parliament for the time being. Admittedly, there is very little in all of this, good or bad, to read across to fast-approaching French elections, the triggering of Article 50, or indeed another Scottish referendum – if that does ever come to pass. We have long argued that country-to-country nuances, in what has at times seemed like a coordinated developed world electoral revolt, are likely more important than the superficial similarities. For their part, the Dutch election results remind us that populist parties may not be systematically underestimated in polls, and that pro-establishment, mainstream parties can still do well in today’s political environment.

For investors, the message remains the same – the prospects for global economic growth and inflation are where our attentions remain most profitably focused. A US interest rate rise and further evidence of robust US consumption tell you much of what you need to know here – stocks continue to be a better bet than high quality bonds and other perceived safe havens, in the context of a global economy that looks increasingly well disposed to reward such an investment stance.

Article 50
The media hubbub is bubbling up again as the triggering of Article 50 approaches. What deal, if any, will the UK get? Will Scotland split from the three-centuries-old Union? These are all very valid questions for residents of the UK to be asking of course. The answers, elusive as they will surely remain for some time yet, will have an important bearing on our economic and social futures. Happily for investors, whether UK domiciled or otherwise, it is likely a little simpler. As we have pointed out for some time, the UK economy plays a relatively minor role in even the UK’s capital markets, and it is near irrelevant to the world’s stock and bond markets, where the fates of the US and continental European economies dominate the outlook.

Sterling does have an important role to play in investment portfolios of course. Here our long-held view that Brexit would eventually prove to be a headwind for the UK economy, but likely a digestible one, suggests that much bad news is already in the price. It is nonetheless hard to see an imminent bounce back in the currency with all the negotiation headlines and a likely tougher economic backdrop to endure in coming quarters. Sterling looks cheap relative to historical valuations, but it can get cheaper still. This week’s employment report did highlight the real pay squeeze starting to bite the UK’s all-important consumer, which – all things being equal – should see growth slide to a lower trend for the moment.

Investment conclusion
When even the main protagonists of the various political dramas playing out in front of us do not know what is coming next, we should be wary of trying to second guess them in investment portfolios, particularly when it may not be necessary. The political backdrop remains fractured, fraught and all the other media-given labels. Parts of the developed world electorate certainly seem discontented, for a range of sometimes unrelated reasons. However, for investors to focus solely on this likely leads them to miss the more important story, which is that the world economy looks revived. There will be bumps in the road ahead; in the short run, positioning in stocks and bonds both look quite stretched in their mirrored trajectories, but the fundamental support for the moves seen since the second half of last year is more robust than many argue, suggesting that there may be more of the same ahead.

blog-tags/Article 50
blog-tags/Brexit
blog-tags/euro zone
blog-tags/european elections
Inflation
blog-tags/Interest rates

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