18 January 2022
2022 has shaped up to be a defining year politically and this will ultimately impact the profile of returns investors can expect, according to Stuart Clark, portfolio manager at Quilter Investors.
So far in January the UK has already witnessed political volatility following the fallout of the revelation of Downing Street parties held during lockdown. This, according to Clark, has fired the starting gun on a year that is likely to be dominated by political risk.
“This year was already going to be an intriguing one from a political perspective given we are likely to see the return of Donald Trump ahead of the US midterms and the number of elections that are ongoing,” Clark said.
“With the UK now facing potential political upheaval, it is key investors don’t rest on their laurels. Politics can wreak havoc on markets, and with inflation and the cost of living already adding to the volatility this year, it might not take much for investments to be impacted.
“For investors, however, there is one key philosophy to keep in mind when assessing political risk. Around any political event there will be short-term noise, but it is important that you keep focused on the long-term and instead look through at what could be implemented and how that may affect your portfolio.
“Volatility will come and can be unsettling but keeping your eyes on the long-term will allow you to view that volatility as an opportunity, buying assets that may see their share prices unfairly punished in the immediate aftermath of an event.”
Below Clark picks out three political events in 2022 investors should be paying attention and what each event might mean for markets.
UK leadership challenge
“Clearly Boris Johnson appears to be in a difficult position, and it remains to be seen if he can survive this latest scandal. Politicians on both sides of the divide have called for him to resign and this has ratcheted up the political ambiguity the UK faces.
“Should we see a leadership challenge or a general election then markets will naturally react to these events. The UK has sufficient checks and balances in place to ensure there is no extreme ideological move and as such the overall market impact may be minimal, albeit with some sectoral rotation if Keir Starmer is elected.
“The problem the UK has for investors is that while it looks cheap compared to the rest of the world, it is so for good reason. Political risk was already a threat for investors as a result of the fallout from the Brexit deal. Foreign investment has been lacking and should we see more uncertainty in Westminster then we should expect the UK to remain undervalued for some time to come yet. We instead see Europe as a more attractive region, as it has the same undervalued qualities, relative to the rest of the world, without so much political uncertainty.
US midterm elections
“Joe Biden faces his first real test with the electorate having assumed the presidency in 2021 with his first US midterm elections. To help boost his party’s prospects, we are likely to see Biden push through a watered-down version of his ‘Build Back Better’ infrastructure plan, as well as hold off on any potential tax increases.
“One point potentially being missed by investors, however, is the fact that the Federal Reserve will likely not make many, if any, moves to its signalled interest rate policy in the run up to the elections to preserve its impartiality. This means if we are to see the three or four rate hikes that are priced in by the market in 2022 and shift from tapering to quantitative tightening they will have to start moving sooner rather than later
“With markets at such high valuations and a backdrop of swift monetary policy tightening, it is difficult to see US equities marching much higher. As such being diversified globally and across investment styles will help investors avoid the large repercussions of any taper tantrum that comes about from Fed tightening.”
French elections
“While unlikely to upset markets too much, it is hard not to look towards France and its election and assess what it could mean for the rest of Europe.
“President Macron is expected to stand again, but populist movements on the continent remain strong. Macron should prevail but it would be no surprise to see his share of vote reduce in the face of increased far-right challenges.
“This could cause European markets to be a little volatile over the period of this election, but given we are likely to see the status quo prevail they should soon settle down. This is one instance where investors must look past the short-term noise and instead focus on what changes are likely down the line. If it is more of the same then there will be little to worry about.”
