We have attempted to move away from delivering timely news as we feel it is in abundance and readers are likely saturated with commentary. Instead, we are hoping to provide a different angle by looking back at apparent critical events over the past month or so and attempting to analyse their genuine impact. There are many pieces of news that occupy significant amounts of investor and media attention, spilling over into markets, that often end up having little impact on the longer-term direction of returns. Currently, the Coronavirus outbreak has the potential of occupying this category.
This month we will consider two significant events that gain a lot of attention from investors as well as the wider population, the UK General Election and the assassination of the Iranian General, Qasem Soleimani.
UK General Election
While at a global level the outcome of the UK general election will have barely registered, for UK based investors, it was of high importance given the typical overweight to domestic assets and impact of the pound’s movements on returns. There were two key concerns in the runup to the vote. First was the potential for a Labour-led government, likely in a coalition, or second the more probable hung parliament, although a weak Conservative majority may have been equally as damaging. A Corbyn government intent on higher taxes and renationalisation encouraged investors to stay away from domestically focussed stocks and the pound. The fear of a hung parliament was not appetising either as it would lead to further uncertainty and probably yet another vote with an unpredictable outcome.
In the end, the large Conservative majority of 80 was warmly received by investors. While there is always uncertainty running into an election, some of the upside of the Conservative majority was already captured in the days preceding the vote. Nevertheless, on news of the outcome the pound jumped to $1.35 from $1.31 days earlier. The major impact though was on domestic stocks, benefiting mid and small cap shares most.
The immediate reaction to the results was significant, however, we now have the opportunity to assess the slightly longer-term implications, specifically by looking at the two most sensitive areas, UK mid-cap stocks and the pound. UK mid-cap stocks jumped aggressively following the election, rallying 6% and outperforming global stocks by the same amount. However, following this initial rally this section of the market has underperformed by a similar 6% to the of January, meaning that over the whole period there has been little disparity. The pound likewise underperformed following the initial rally, removing most of the gains seen over the preceding weeks.
While we do believe that the Conservative election victory is an important stepping stone to greater certainty and ultimately UK equity outperformance, this may be something that is borne out over a longer time period. Indeed, it will take many years for any change in policy to impact the real economy and if there is a Boris bounce in business sentiment, this will also have a delayed effect in fundamental company performance. In the meantime, it appears that the boost to sentiment from the Conservative victory has been quickly usurped by concerns over trade negotiations with the EU (and others), as well as the weak domestic economy and the potential for a rate cut by the Bank of England.
The other significant event of the recent past was the US assassination of Qasem Soleimani, the highly regarded leader of the Iranian Quds force. The action by the US and the potential for escalation clearly occupied much of investors’ attention at the time. Oil rallied on the expectation of supply disruption and Middle Eastern assets suffered. The fear of reprisals by Iran and countermeasures by the US opened the possibility of a full-blown war between the two, potentially dragging in others. However, within days, both sides talked down their desire for escalation and while Iran did fire missiles at US military bases, there was little damage and the US did not respond.
While there should continue to be a risk premium built into relevant assets, this is a prime example of an event whose impact has dissipated rapidly and likely forgotten by most market participants. In fact, the oil price, which was the most impacted and most important for global investors, is actually over 15% lower than it was before Soleimani was assassinated.
Although it is not always the case that major news events end up having little impact on long term asset class returns, more often than not it benefits investors to try and look through such events and let others concern themselves with the noise.