Maintaining focus during political upheaval

2024 was dubbed ‘the election year’, one in which political uncertainty was expected to be a cause of volatility for investors. As the US election intensifies, investors would be well served maintaining their long-term focus. Our Chief Investment Office explains further.

According to The Economist, in 2024, “76 countries were scheduled to hold elections in which all voters have the chance to cast a ballot.” All up, these countries are believed to account for more than half the world’s population. As investors, the relative calm over the first half of the year has come as a pleasant surprise.

Narendra Modi’s narrow win saw Indian shares momentarily tumble; the surprise UK election and ensuing landslide victory for the Labour Party saw British share markets celebrate a clear policy direction, while the European parliamentary elections and resulting snap French election triggered isolated volatility across French rates markets. Those aside, there had been little cause for more widespread moves.

Then again, it could be argued that the race to be US president was the only election of global consequence for investors this year. Even so, for a country that has in recent years endured a presidential impeachment for the incitement of insurrection, a storming of Capitol Hill and a brazen attack at the home of the House Speaker, the 2024 election campaign had been pleasantly calm – that is, until last month.

Indeed, July was a stark reminder of the growing divide not just between, but also within nations. A worrying performance in the presidential debate on June 27 by President Joe Biden was followed in quick succession by a series of embarrassing gaffes at the NATO summit, where he referred to Ukrainian President Zelenskyy as "President Putin" and running mate Kamala Harris as "Vice President Trump". While this led Democrat powerbrokers to start moving for him to withdraw from the presidential race, it was the attempted assassination of former President Donald Trump that saw an already worrying US election take a very dark turn.

Since then, President Biden’s withdrawal from the race and the rise of Vice President Harris to the presumptive Democratic presidential nominee have left no shortage of market noise for investors to navigate.

At month-end though, the impact of political upheaval was hardly discernible. Indeed, while volatility rose sharply over July, the S&P 500 has finished the month broadly flat, and Treasury yields fell appreciably as evidence of disinflation continued to mount.

For investors, it is a timely reminder that the market reaction to political upheaval is typically short-lived. Rather, it is the policy implications, likely to play out over the long-term, that investors should focus on.

So, while we remain alert to the potential for further geopolitical spikes, we would caution against making short-term moves in anticipation of binary outcomes or in reaction to unanticipated market turbulence. Rather, we remain focused on the medium-term outlook for markets and the intended long-term investment objectives of our individual risk profiles. 

Here, it is fundamentals, relative pricing and the possible impact of other factors including liquidity and seasonality that drive our portfolio positioning. In the case of valuations, equities continue to appear stretched across some pockets, in particular the broader US market – both on an outright and relative basis when compared to other regions and fixed income assets.

Despite the higher for longer interest rate environment, the S&P 500 has remained incredibly resilient all year. A closer look at performance shows that through to this point of the year, the S&P 500 has only notched more new all-time highs on four previous occasions – 1964, 1995, 1998, and 2021. Indeed, based on past performance there is good reason to expect this resilience may continue through year-end.

Nonetheless, equities have started to display some signs of fatigue, particularly US mega-caps, as investors start to question how quickly the huge AI-related capital expenditures can become accretive for corporate margins.

The US market has continued to climb new highs

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We remain positive on the structural outlook for mega-cap stocks but acknowledge that the growth witnessed over the past 18 months is unlikely to be sustainable. Against this backdrop, we view sharper pullbacks as a potential opportunity to add exposure to portfolios. We recognise portfolios will need to continue to have an allocation to this segment of the market given its market capitalisation and potential outsized impact on portfolio returns.

Across fixed income assets, sovereign bond yields are still generally trading above 4%, and we see opportunity for both carry and positive capital appreciation as the easing cycle gathers momentum. Elsewhere, spreads across some segments of the high yield market pushed wider following the European parliamentary elections, and while fundamentals remain largely unattractive given the prevailing recession risks, in the short-term, momentum should continue assisted by strong technical support.

What this means for our diversified portfolios

Assessing relative value between asset classes we continue to position cautiously across portfolios, with a mild preference for long duration assets as a hedge against a sharper than expected downturn.

With share markets having run incredibly hard over the past 18 months and valuations across some segments of the markets continuing to appear stretched, we have elected to take some profits from broad developed market equities. Part of the proceeds have been redeployed into European equities, based on valuations and a macroeconomic backdrop that is not as negative as previously anticipated.

At the same time, we have trimmed our underweight to high yield credit, reducing the sizeable underweight to European high yield that was held across portfolios. This has seen our overall position in high yield move to a mild underweight from underweight previously.

The change is premised on seeking to take advantage of what we believe should be positive carry in the months ahead, as equity markets possibly look to take a breather in the near-term following the strong gains to date.