Newton: Politics is a Disruptive Influence on Stock Markets

US presidential candidate Hillary Clinton’s pneumonia is the latest news to stir up markets, but what does shifting politics mean for equity investors?

Emma Wall 12 September, 2016 | 1:46PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Raj Shant, Manager of the Newton Global Opportunities Fund.

Hi, Raj.

Raj Shant: Hi, Emma.

Wall: So, Global Opportunities Fund, but with a large allocation to the U.S., a sector that is in the news a lot recently, today because unfortunately we've heard a health scare from Hillary. The Hillary versus Trump obviously is on the horizon. How does that affect you as an investor in U.S. equities?

Shant: Well, I should start by saying that we're running a very concentrated portfolio. It's only about 40 stocks in there. So what we invest in is very stock-specific. But of course, we do pay attention to the macro environment and at Newton we have top-down investment themes. And when we look at something like the U.S. election, Trump versus Clinton, we pay attention to it, but we're also paying a lot of attention to the individual securities that we're investing in.

So, at the most general level, I'd say, the Trump versus Clinton issue, it's indicating that there's going to be much more impact on financial markets than there has been historically from the election and we saw that previously earlier in 2016 with the Brexit. There's also an important referendum coming up in Italy in the autumn. So, politics is coming to the fore and we think that's actually not an entirely new thing. It's part of a long-term trend.

We have a theme at Newton called mind the gaps and the idea behind that is that the gaps between the winners and losers are widening. They are the widest it's ever been. And this works at a societal level, but between sectors, between regions and countries and we think that's creating more risk of flash points and politics is actually reasserting itself as a potential disruptive influence on financial markets.

Wall: Because quite often people who sit in that chair say, economics are not stock markets. Just because you have economic growth or you have economic slowdown does not mean you necessarily do in the markets. But that doesn't mean that the two things aren't interlinked, does it? I mean, economic policy does have an effect on stock markets.

Shant: Absolutely. And I think if you look back at the period since the last financial crisis, the policies adopted by governments and primarily their central bankers had a huge influence and we would say – Newton would say a distorting influence on financial markets of all types all around the world. So we are very careful to bear that in mind and we think there is the possibility that – and rather counter to the consensus in financial markets, we don't think these policies are working.

Printing money, buying financial assets on a large scale, we don't think they are the route to prosperity. We don't believe that this will help economies reach escape velocity which I think is the buzzword. It's been seven years now. So I don't know how much longer we're just going to keep going down this route of the same policies.

And obviously, you say in the U.S. election Donald Trump has been quite vocal in criticizing the Federal Reserve's policies. I'm not sure his reasoning is the same as ours, but we think they are exacerbating inequalities, inflating asset prices and there's generally rich that earn the assets, whilst actually not really doing anything for main street, for industry and for the productive capacity of the economies. So, we are quite skeptical about the policy environment that we're in.

We think it distorts relative pricing between bonds and equities and indeed, even within the equity universe. And so when we're picking individual stocks, we're very careful that we don't buy stocks that are dependent on easy money and this easy money environment that we have at the moment continuing for the long term.

Wall: Raj, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BNY Mellon Global Opps GBP Inc5.13 GBP0.71Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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