Political markets are usually short-lived phenomena. This means that political turbulence often only impacts financial markets for a short time. But what happens if these events occur ever more frequently and closer together? Maurice Obstfeld, Chief Economist at the International Monetary Fund (IMF), recently answered exactly this question in a guest contribution for the newspaper Die Welt.[1].He fears that political disputes could become a problem for the global economy.
One current example of political interference is the case of the Turkish lira. The public spat between Donald Trump and Recep Tayyip Erdoğan was the last straw that caused the Turkish currency to plummet. The turbulence on the currency front also had a negative impact on the stock markets – just like the Brexit vote or the threat of US punitive tariffs on EU products. They also led to short-term market irritations.
One positive aspect for investors is that the political squabbles have not thus been able to halt the market uptrend for long. Looking ahead, caution is advised, however. “There are enough reasons to continue expecting volatile markets,” explain the DWS investment strategists in their latest outlook.
Why the bull market could continue
It is clear that political disputes can pose a risk to the economy. For example, customs duties negatively impact sales opportunities for many businesses, sanctions lead to rising oil prices or falling exchange rates (Turkish lira), and uncertainty over Brexit stifles or delays investments on the part of companies.
The fact is, however, that the fundamental data for the global economy remain positive. While the ifo World Economic Climate fell from 16.5 to 2.9 points, it is “still at a high level,” summarized Clemens Fuest, President of the ifo Institute.[2].The International Monetary Fund (IMF) is also maintaining its growth forecast of 3.9 percent for both 2018 and 2019.[3].
Investors are faced with an extremely challenging environment. Political disputes can spill over onto the stock markets at any time. “The economy is booming, but we are exercising somewhat more caution on the markets. The reason for this is political developments,” explains Stefan Kreuzkamp, Chief Investment Officer at DWS.
A good option therefore are fund solutions that can respond flexibly in turbulent times as well. Modern mixed funds, such as those offered by DWS, adapt to changing market phases and shift the capital between various asset classes. One of their strengths is that they use currency and hedging strategies to provide some capital protection when markets are falling. Furthermore, they can make use of price setbacks to enter the market at favorable prices.
Fund selection:
1. www.welt.de/wirtschaft/plus180620838/IWF-Auch-Deutschland-schadet-dem-globalen-Freihandel.html; as at: August 6, 2018.
2. ifo Institute, ifo World Economic Climate, Results of the ifo World Economic Survey (WES) for the 3rd Quarter 2018; as at: August 9, 2018.
3. International Monetary Fund (IMF), World Economic Outlook Update; as at: July 16, 2018.
