'It's the central banks that continue to dictate markets, not global elections'

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'It's the central banks that continue to dictate markets, not global elections'

Elections taking place around the world this year, most notably in the US and possibly UK, should not have a big bearing on investment markets, says Chris Metcalfe, chief investment manager at Iboss Asset Management.

Instead, it is the central banks, with the Federal Reserve at the wheel, which dictate the way markets swing, he says.

In a Q&A with FT Adviser In Focus, Metcalfe explains why this time round investors are calm about the prospect of a Labour government, and where the opportunities may lie in this year of elections.

FTA: A number of elections are planned for this year. Do you expect to see any effect on investment markets?

CM: Just like the markets are not necessarily reflected in the economy, neither necessarily is politics.

The greatest known unknown in 2024, and to markets, is the effect a Trump victory would have on the various global conflicts.

Again, it is difficult to plan for a situation that is uncertain in the first instance, and based on his first term, it's difficult to know what his response to the conflicts would be should he be elected.

Chris Metcalfe, chief investment manager at IBOSS Asset Management

 

Until truly extremist policies are inflicted on companies, there is little action an investor can or should do with their investments.

 

 

FTA: Which other developments are you looking out for?

CM: Elections are similar to other geopolitical events in that while it might feel like you should be doing something, doing nothing might be the most prudent course of action.

FTA: What's typically more impactful, the build up to an election or the outcome?

CM: Regarding the upcoming elections in the UK and US, the best thing for investors to do is focus on what will move markets and avoid getting overwhelmed by sloganeering, petty point-scoring and the lowest common denominator politics during the build up.

Until truly extremist policies are inflicted on companies, there is little action an investor can or should do with their investments.

Where there are changes to be made at the margin, then active managers should have an edge and try to anticipate changes in policy.

FTA: What have previous elections, particularly in the US and UK, taught us about the build up?

CM: If the build-up to the last US election was less than edifying and somewhat depressing, unfortunately, we can expect worse in the months leading up to this one.

In the UK, the UK managers we have spoken to are fairly relaxed about the expected outcome of a Labour victory.

This is in stark contrast to the previous election, when some managers were concerned about the implications of a Labour victory under Jeremy Corbyn.

Following the Brexit vote, there was concern that the UK might be going down a more nationalistic road, but seven years later, the battle is between a Labour and Conservative party, with both of them having reasonably centrist agendas.

It is, instead, countries such as France, Germany, the Netherlands and Italy that are having to deal with a resurgent streak of nationalism and policy moving toward the right.

Governments and opposition parties will often flag their intended targets, having worked out which policies will garner the most votes.

FTA: What opportunities might investors see this year (and will they be influenced by electioneering)?

CM: In a world where market dynamics are constantly reshaped by geopolitical tensions, economic divergences, and national peculiarities, it's the central banks, with the Fed at the wheel, that continue to dictate market movements, not global elections.

Despite North America continuing to dominate the headlines, 2024 has been characterised by a geographically more broad-based rally, especially since January 22.

There are many opportunities out there for investors, but they are not in the same places as they were previously.Chris Metcalfe, Iboss 

Notably invigorated by a revitalised Chinese economy, challenging the once stale narrative of its investability with newfound optimism.

One of the core reasons for our positive outlook on UK equities is the attractive valuation of many companies.

Compared to their global counterparts, UK stocks are, on average, trading at a discount, with their price/earnings ratio now close to 40 per cent lower than the rest of the world.

This undervaluation presents a unique opportunity for investors to gain exposure to high-quality companies with strong fundamentals, positive cash flows, and solid dividend yields at a lower entry point.

The value proposition is particularly compelling in the financial services, energy, and consumer goods sectors, where several companies stand out for their resilience and growth potential.

Overall, the domestic economic outlook is also looking somewhat better, and we believe after a fairly dismal couple of years, small and mid-cap stocks are best positioned to benefit.

Beneath headline-grabbing developments lies a nuanced story of shifting market paradigms: the convergence of growth and value sectors and the undercurrents of active versus passive management strategies.

This means that there are many opportunities out there for investors, but they are not in the same places as they were previously.

FTA: What's your general outlook for this year and how can investors and their advisers position themselves in the best way possible?

CM: We maintain a favourable outlook on markets and sectors that offer attractive valuations on a relative basis and contain companies that haven’t excessively capitalised on the artificial intelligence hype, or the retail investment frenzy.

While acknowledging the potential for further growth in certain AI-related stocks beyond the US, we have exposure via Europe, Asia, and Japan.

Our allocation strategy tilts underweight towards the US compared to our peers. However, within our US holdings, approximately 50 per cent is invested in value-oriented companies – a position we’ve upheld for the past two years.

We remain bullish on UK equities, as we have for some time. While risks and uncertainties exist in any investment landscape, the UK market’s current conditions and underlying fundamentals present a compelling case for inclusion in any investment portfolio.

Our overweight position is in the Asia Pacific and emerging markets, with a specific focus on Latin America and India, as we anticipate these regions benefiting from de-globalisation and friend-shoring.

While we hold a slight overweight position in China, we believe that if China continues to falter then other Asian and emerging markets will be the primary beneficiaries.

That said, while our investment portfolios are tilted to these areas, they remain well diversified. We continue to believe diversification remains crucial in the current market environment.

carmen.reichman@ft.com