Investors: Ignore Politics, Focus on Fundamentals

Predicting both political outcomes - and how the economy and stock market will react is near impossible. So focus on fundamentals when making investment decisions

Simon Molica 3 March, 2017 | 1:54PM
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Simon Molica: So far in 2017 what we've seen is a continued strength in equity markets. The last two months have continued to be strong, very much akin with what we actually saw in Q4 last year as well. This whole growth reflationary trade is supporting the equity markets. Now, of course, there remains lots of uncertainty as that ever is in the markets and today. However, actually predicting these type of binary events we think is very difficult indeed and not something we necessarily pay too much attention to here at Morningstar. Instead, what we actually look to do is fundamental analysis on the markets to determine where they are on their valuation cycle.

Now, actually, if we look back to 2016 and the uncertainty and the outcomes of some of those uncertainties, it was very difficult to predict and most professionals got it wrong. And not only that, actually predicting how the market would behave to the uncertain outcome is also incredibly difficult.

So lots of professionals talked about Brexit leading to a U.K. recession. Well, as we know, so far we've had 2.6 GDP results and actually we are not in a recession today. Equally with the results of Trump winning the U.S. election, there was an expectation that would be bad for the equity market. Well, actually, instead there was a strong rising market for U.S. equities in particular.

So it does remain very uncertain today. And some of the issues around today, a continuation of what we've had over the last couple of years, European instability potentially, geopolitical risk as well, much more movement to divide, these are concerns, but these are binary events that we just can't predict.

Instead, as I've said, we focus very much on fundamental analysis. And today, where that's leading us to is to consider the fixed income market to be very expensive as we have done for a number of years so far and equities to be closer to fair value and, if anything, becoming a little bit expensive with the continued strength that we've seen recently.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Simon Molica

Simon Molica  is a portfolio manager for Morningstar Investment Management