Investors hate mixed signals. Stock markets perform best when company updates, central bank policy and geopolitics are all favourable. Now, much of the news seems contradictory and stock markets lack direction.
Amid all the noise, what should investors focus on?
Politics may be the easiest worry to dismiss at present, whether it is the outcome of the US presidential election or elections in Italy and elsewhere in Europe that could destabilise the EU.
Politics generates headlines but rarely does much to shift real economic performance. While political developments add to stock market volatility, they should not panic investors into selling.
Politics is just part of the fog that surrounds investment. At a global level, increasing nationalism threatens to dampen world trade. Brexit is just one example, but the tide has turned against politicians promoting globalisation in many countries.
India, Turkey, Russia and Brazil are each reasserting national interests and it may be that some elections within the EU follow suit.
While markets could temporarily react to votes that threaten the EU, the response of Germany and the European Central Bank (ECB) may be to allow even more monetary stimulation.
The EU has survived much political change over the decades. Indeed, pressure on the EU could encourage it to view Brexit pragmatically and allow British exit on terms with minimal disruption on both sides.
Nor is it clear that Brexit should hit shares of UK domestic businesses. The Bank of England appears alert to the risk of a downturn and the next UK Budget may support that view too.
Already the fall in the pound, which may have further to drop, has encouraged some manufacturing relocation to the UK.
Industrial businesses and exporters should benefit, but the biggest fall-out from the weakening of the globalisation trend is likely to be the failure of the two main global trade pacts - the Transatlantic Trade and Investment Partnership (TTIP ) and the Trans-Pacific Partnership (TPP).
These are now at risk whoever becomes US president. That may reduce prospects for global growth, but equally could exacerbate world disinflation.
Politicians and investors should be more concerned about low productivity growth, weak real wage growth and a persistent downward pressure on inflation in many countries. Monetary policy is unlikely to solve that.
Whatever the result of the US presidential election, it may be followed by a boost in infrastructure spend.
While other countries have attempted to invest in infrastructure to boost growth, much of that has been unproductive.
The new US president will have more economic levers at his or her disposal, a much sounder bank sector than in Europe or China and a confident business sector.
However, just as the US has made good progress with its bank sector, US bank reform highlights how far behind that Europe and China are.
The combined market capitalisation of Germany’s two largest banks is now less than that of RBS, which is itself hardly a poster child for the sector.
This may or may not be a sensible conclusion by the stock market, but it does point to how small bank valuations are relative to the overall size of their enterprises. Banks continue to be what matters amid the noise.
Eight years after the Lehman crisis the job of bank sector reform remains incomplete and there seems little political will to push banks any further in case that might damage economic growth.
Instead, it means that banks are unwilling to lend more until they have sorted out and written down previous bad loans.
Unhelpfully, the ECB’s policies discourage write-offs and are at the heart of the eurozone’s problems. This is the area that should most concern investors.
Raising finance for some of the eurozone’s largest banks is likely to be the biggest issue for world stock markets, rather than elections.
A recurrence of problems in the banking sector will at least be met by governments and central banks that are prepared, albeit with less ammunition this time.
Investors need to be prepared, too, with diversification in their assets. Stock markets often rally in the last quarter of the year, but investors should make sure portfolios and share investment in particular is within their comfort zone.
Colin McLean is managing director of SVM Asset Management
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