Markets are immune to political factors

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Edward Bland, director and head of Equities at Duncan Lawrie Bank comments t on the impact of recent political conflicts on capital markets, and what this means for investors

What is the impact of political factors on capital markets?

Markets appear to have become desensitised to political conflicts – for example there was hardly a ripple the latest major event occurred when the Malaysian airline was shot down.  The geo-political factor doesn’t appear to account for anything anymore.

Are the markets just saying these are localised events?

In effect they are.  They are saying that provided there is no disruption to economic growth either locally or globally, and corporate earnings continue to advance, then why worry.

What benchmark is being used by the markets?

The markets are using the Financial Volatility Index, the collective benchmark of investors’ perceptions of risk.  This benchmark has normally followed the credit cycle at the moment it’s right down at the bottom of its range.  With interest rates remaining flat, and cash being plentiful the markets are carrying on as if this is going to continue forever.

What could cause a change to the equilibrium?

Naturally a change in the interest rate cycle, trending upwards in the UK or US, twinned with the possibility of an escalation in the conflict in East Ukraine which could result in pull back on the EU which is currently groping its way along in terms of growth.  This could disrupt that growth.  The combination of both these factors would cause capital markets to go into reverse.

So should investors be relaxed or worried?

Investors shouldn’t be complacent any longer.  We’ve had five years of a Bull market, interest rates are faced with starting to trend upwards, and conflict close to Europe is simmering away.  People need to start thinking about de-risking their portfolios and raising some cash – and if they are feeling extremely risk-adverse they could look at gold – but the key thing is that they need to have liquidity within their portfolios.

 

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