With 2017 well underway it is worth recalling that in our last edition of Focus we considered Political Risk, and the likely effects of European elections (and the surprising outcome of a US one) on global stockmarkets.

So how have markets fared so far this year? As at the start of May nearly all major stock markets have posted modest gains, with small and medium-sized companies leading the way in the UK. Thus far, markets have taken most geopolitical events in their stride. A Referendum on Constitutional Reform in Italy and Elections in Austria and the Netherlands passed by without a murmur. In a reversal of recent poll results, Populism did not triumph.

In the UK, Article 50 of the Lisbon Treaty was invoked (as expected) to start the countdown for the UK to leave the European Union. So far, neither side appears accommodative to the demands of the other, so we should expect many months of tough negotiations ahead of us. Theresa May’s snap Election announcement for 8th June was unexpected, and sent the FTSE 100 down by 3% and Sterling up against the dollar by around 2%. A stronger Tory majority is seen by some as increasing the likelihood of a “Hard Brexit”, which could have adverse economic consequences over the medium to long term.

Meanwhile in the US, interest rates rose to 1% in March, but the “Trump Trade” appears to have faltered in the short term as markets have cast doubt on Trump’s ability to follow through on campaign pledges of tax cuts, infrastructure investment and job creation. A deterioration in diplomatic relations with Russia and Iran, tensions with North Korea, and a willingness to engage militarily in Syria and Afghanistan, have created political uncertainty. One positive aspect of US/North Korean tensions has been the need for US/China co-operation in dealing with North Korea, resulting in Trump’s declaration that China is not the world’s biggest currency manipulator after all, putting fears of trade wars between the two nations on ice – at least for now.

In Europe, we have German Federal Elections to look forward to in late September, and markets have remained calm following the election of Emmanuel Macron in France. The success of Macron/Le Pen in the first round illustrated both the French malaise with the established political parties as well as a significant undercurrent of euro-scepticism. The result assures France’s continued membership of the EU, though may herald tougher Brexit negotiations for the UK Government.

Headlines about a renewed Cold War between Russia and the West, and potential conflict between the US and North Korea will understandably put many investors on edge. However, history shows that stockmarkets in Developed Economies can be very resilient in the face of major global events, even armed conflict.

Events that are likely to have a long-term impact on a nation’s economic stability will more profoundly affect stockmarkets. In other words, US economic policy is likely to be more important than its foreign policy, whilst UK/EU negotiations will be key for markets in the UK and Europe. A stockmarket index is more highly correlated to the trading results of its individual constituents than the health of the national economy it relates to. For example, the FTSE 100 Index consists of companies from many different industries with diverse trading outlooks at any given point in time. They rely less on the UK economy than smaller companies as they derive more of their earnings overseas. This means they can actually benefit when Sterling is weak, whilst not being quite as exposed to a downturn in the UK economy.

We believe that proactive management of a portfolio diversified across markets and currencies is the best way to manage both economic and political risk over the medium to longer term. Periods of uncertainty can also keep investors away from markets, which can be helpful in allowing more measured demand and growth in asset prices.

The World Bank’s March update portrayed modest global economic growth, a more supportive environment for global trade and multi-year high Purchasing Managers’ Index figures, indicating growing confidence from manufacturing industries and service providers.

In summary, whilst we are aware that political risk still exists and will create further stockmarket volatility in the short term, we continue to believe that equities (though not necessarily cheap in some areas) offer good value relative to fixed interest securities and cash, and can provide a valuable dividend stream for those requiring income.