First the EU referendum, then the election of Donald Trump. In 2016, investors were surprised by events that pollsters and other experts said wouldn’t happen, although on both occasions stock markets swiftly recovered before reaching new highs.
The High Pay Centre think tank has dubbed today ‘Fat Cat Wednesday’, having calculated that by lunchtime leading executives will already have earned the average UK salary of £28,200.
Stock markets emerged unscathed from the shock of the EU referendum result and the election of Donald Trump, but will investors be so sanguine in 2017?
Despite widespread calls for fiscal stimulus, the Chancellor confirmed the government will continue with austerity, albeit a little less aggressively.
Few would dispute that a grounding in economics is a vital weapon in any professional investor’s arsenal, but evidence increasingly suggests an understanding of psychology could be just as or even more important. Recent financial events reveal repeated patterns of irrationality, inconsistency and incompetence in human decision-making.
Globalisation is a highly contentious issue with many advocates and detractors. Nonetheless, throughout history, free trade has generally been good for prosperity, whereas periods of protectionism, such as those of the Corn Laws and Great Depression, have not.
In an age of quantitative easing, negative interest rates, low oil prices and limited spending, many investors could be forgiven for finding the global economy increasingly difficult to understand. We look at some of the driving forces and consider how best to respond to a frequently puzzling picture.
The UK has voted to leave the European Union, which will trigger two years or more of negotiations once Westminster formally notifies Brussels of its intention to secede. However, the referendum result is advisory rather than mandatory and there are significant constitutional issues that must be resolved before such notice can be given. As a result, UK and EU politics will have a significant impact on financial markets in the short to medium term.
More questions than answers
Diversification has long been used to decrease investment risk by reducing exposure to a particular asset. It works within a single asset class — a portfolio of stocks is less risky than holding shares in one company — but can be more effective across different asset classes.