Elections and stress tests could spook markets

And while the macroeconomic environment does not always have an immediate effect on investments, in a multi-asset portfolio, it can be difficult to ignore.

In the emerging markets it has been the election year, with the most recent result coming from Brazil as Dilma Rousseff scored a perhaps unexpected victory to remain in power, with a 51.6 per cent share of the vote.

The result may not have as much of an impact in terms of reform as the Indian and Indonesian elections earlier this year.

However, the result could see some much-anticipated changes start to filter through in the Bric (Brazil, Russia, India and China) country, given the widely publicised support for Ms Rousseff’s opponent, Aécio Neves, who was seen as the more business-friendly candidate.

But in the developed world, the biggest issue has once again become Europe.

While it is not quite as serious as the sovereign debt crisis of a few years ago, the slowdown in economies across the region, including Germany, has raised fears of a triple-dip recession.

In addition, the recent results of the European banking stress tests have not done much to steady the market, in spite of the results being relatively good news, as there are some flaws in the methodology.

Tom Becket, chief investment officer at Psigma Investment Management, explains: “Focussing on the stress tests, we are comfortable that some parts of the macro scenarios they painted were sufficiently strict.

“We would note that elements of the tests were, in fact, harsher than comparable tests carried out in the US earlier this year.

“However, both the fact that the adverse scenario was not the potential ‘Japanese’ episode that is entirely possible, and the end result of claiming that European lenders need to only raise ¤9.5bn [£7.5bn] of further capital in spite of the threat of a genuinely deflationary period, partially defeats the purpose of the whole practice.

“In simple terms, this was not very stressful. We would have preferred that the European Central Bank [ECB] saw this as a ‘one-off’ opportunity to finally rid the European financial markets of the potential systemic risk caused by major losses at European banks – much as the Americans did so successfully in 2009.”

Mr Becket continues: “We would have liked to have seen the ECB force European banks to raise a large amount of fresh capital, whether it was deemed necessary or not, after the strengthening of their balance sheets already this year.

“Boringly, they have not done this and so the doubts will persist.”

Nyree Stewart is features editor at Investment Adviser

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