Politics, market reactions and “surprises”

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  • Value Insights

The year 2016 was, more than others recently, very much characterized by political decisions around the globe which led to significant changes of investor expectations and levels of uncertainty. As indicated by the introductory quote, this year had a particularly long list of surprises. But the market participants’ reactions were more pronounced than in recent history and it was by no means a surprise-free year. The following three major events were probably most debated and covered in the media:

  • In June, the UK decided in a referendum whether they should leave or remain in the European Union. “Leave” won by 52% to 48% which became widely known as the Brexit.
  • In November, the United States voted their 45th president. Donald Trump received 304 electoral votes, defeating Hillary Clinton with 227 votes (even though Clinton won the popular vote by 2.9 million).
  • In December, a constitutional referendum was held in Italy, asking voters to approve several amendments to the constitution including the composition of powers between administrative entities, the regions and the state. The Italian Prime minister, Matteo Renzi, put his own future at stake by promising to resign at defeat. The result was a clear victory of the “No” vote.

It is very important to note, that all of the abovementioned outcomes of political decisions were far away from what pollsters suggested prior to these events. They as well as the bookmakers considered UK voters very likely to decide to remain in the EU. In the United States, pollsters put the chances of Hillary Clinton winning far above those of her opponent Donald Trump ahead of the election. Further on, the pollsters considered the result for the Italian referendum to be very close, yet trending towards “No”; however, by no means had they expected a difference of around 20%.

We do not know if the pollsters wrongly interpreted the data, if respondents did not give honest answers, if they did not use a representative sample or what may have led them to fail at anticipating the outcomes or at least its tendency. Since those outcomes even surprised pollsters and experts, the level of uncertainty increased – the main ingredient of short-term price fluctuations.

Goran Vasiljevic

Managing Director (CEO, CIO)

 

"Forecasts create the mirage that the future is knowable" (Peter Bernstein)

Certainly, these events have shown that outcomes and market reactions are often unpredictable, despite polls often suggesting otherwise. Nevertheless, investors often position themselves with a definite set of expectations and its degree of certainty, which is mostly unjustified. Therefore, some assets are priced as if the future is predictable from a political, economic, and market behavioral standpoint.

To us, it is not foreseeable to what extent any event has already been discounted in stock prices and to what degree different scenarios are likely to happen; as an example, Hillary Clinton was not only favored to win the US presidential election, but she was also “favored” by the market. As seen by market anticipations leading up to the vote, with increasing “certainty” of Hillary Clinton winning the presidential election, stock prices moved up, while on the flip side, market prices fell as soon as Donald Trump won ground in the polls.

On Monday and Tuesday of election week, markets moved up expecting Hillary Clinton to win. Following the election of Donald Trump, the market’s perception turned on its head and the US market had its best week since 2014.

Even though all three major election results seem to be the opposite of what investors were hoping for, the equity markets closed the year clearly higher than they had started in January.

In 2017 there are again several elections in economically influential countries which could be decisive for the political landscape, the economy, and also to market sentiment. Among others, there will be the Dutch general election in March, the French presidential election in April, and also the German federal election in September. All of the aforementioned events are carrying the possibility of catapulting populist parties into the seats of power. The upcoming elections might offer other surprises, or they might not. We simply do not know what will happen, nor how the market will react on either outcome.

With these observations in mind it is important for us to focus on our strengths and continue to stay a disciplined and prudent value investor. All our efforts are focused on finding undervalued companies which are able to navigate through tough waters. Therefore, political events do not alter our portfolio positions in advance. We do not believe that there is a competitive advantage of predictions to outcomes of certain events, and we have certainly not developed a competitive advantage in doing so.

In general, we do not make predictions about short-term market movements or reactions to political events. Following these events, changes of positions are also rare, unless either valuations of certain segments become more attractive or our portfolio has become too expensive through its outperformance. Typically however, political events increase uncertainty and reduce visibility for short term investors. In these periods, we need to acknowledge that investors are willing to pay a high price for perceived certainty or predictability. As a value investor, this provides us with the opportunity to become more active, seek new bargains, and position ourselves for the mid- to long-term.

Price fluctuations do offer, ceteris paribus, buying and selling opportunities. Principally, like many fellow value investors, we stick to our contrarian mindset and concentrate on the long-term perspective. We focus on companies with superior cash-flow characteristics over an entire cycle and try to discover mispricings, which may occur in times of high uncertainty. Companies have and will adapt to the new environment over time. It is not an option – it is a must for economic survival.

The last year marks a difficult one for many investors and strategies in rapidly changing market environments. We managed to achieve superior investment results and navigate successfully through these tough waters by focusing on our investment process of selecting undervalued companies and refraining from short-term, emotional reactions.

We certainly cannot ignore political decisions and developments. However, our task is to focus on what we believe our competitive advantage is, i.e. selecting undervalued stocks! Short-term timing of market movements or macroeconomic forecasts do not belong into the repertoire of our decision making process. Based on our philosophy we remain committed to value-oriented stock selection.

Disclaimer

Lingohr & Partner Asset Management GmbH is a financial services institution as defined by the German Banking Act and is subject to supervision through the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin). Its registered office is in Erkrath, Germany.

This presentation is intended exclusively for individuals who, professionally or commercially, buy or sell securities or other investments for their own account or on behalf of others (institutional investors).

Lingohr & Partner Asset Management GmbH is the author of this presentation. Reproduction of this presentation, duplication of the information or data contained therein, particularly the use of text, graphics or image material, whether entirely or partially, is permitted only if specific approval thereto has been given by Lingohr & Partner Asset Management GmbH.

Historische Performance-Daten sind keine Garantie für die zukünftige Entwicklung.

Lingohr & Partner Asset Management GmbH reserves the right to change or add to the information contained in this presentation.

Past performance of financial instruments is no guarantee of future results. We do not provide any guarantees regarding the accuracy or completeness of the information.

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