Even after the passing of some of the most economically damaging policies the nation has ever seen, there are still some investors who insist that politics and investing don’t mix. These investors somehow believe that economic and financial market performance are independent of policy.
Seems hard to believe when you look at the structure of government. In the U.S., the President appoints the Federal Reserve Chairman and few would deny that the Fed plays a major role in interest rate markets and has influence over other asset markets. The Congress has the power of the purse. And one-fifth of the nation’s GDP is made up of Government spending—surely the elimination of one-fifth of the GDP would have an impact on the economy and financial markets (probably a positive one).
Even if some don’t want to believe that politics matter in investing, the evidence says otherwise. They certainly matter to Brazilian investors where stocks first rallied on hope that incumbent Dilma Rouseff was poised to lose the election only to crater as polls showed she is back in the lead.
Politics also matter in India. Indian stocks started to soar as soon as it became apparent that Narendra Modi would become the country’s next president
In Russia, politics or rather geo-politics have mattered to investors. The Russian market hasn’t responded well to tensions in Ukraine or sanctions.
As unpleasant as it may be, the analysis of politics and policy have a role to play in investing. Those who ignore politics do so at their own peril.
Jeremy Jones, CFA
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