A government of sorts may have been hurriedly thrown together by Theresa May at the end of last week, but the outcome of Election 2017 is likely to mean another period of political paralysis either way.
The consensus – though consensus has become as dangerous a term in politics as it is in investment – is that another election will follow either this year or next.
It means we’re no closer to finding out what form Brexit will take, though the odds of a softer version have increased.
The investment impact is, for now, limited. But paralysis is becoming the theme of this year in more ways than one. The problem that investors face has nothing to do with reading the political runes. It’s more fundamental than that: working out just where to allocate clients’ money.
There have always been difficult choices to make here. Right now, however, it feels more pronounced than it has been for some time.
While the notion of whether or not US equities are overvalued has long been on investors’ minds, there are plenty of other asset classes of which similar questions can now be asked.
The likes of US valuations may have further to run than usual, given the amount of cheap money that has chased assets higher since the financial crisis. In other asset classes, it’s a case of wondering whether the swift rebound can be extended any further.
But the recent rallies in European stocks, emerging market equities and high-yield debt, to name but a few, make it much harder to spot the relative value opportunity.
Dig a little deeper and there’s more complexity. Overvaluation concerns have seen plenty of allocators make bold shifts away from various areas of the market since 2010 – be they US stocks, government bonds, or something else.
In most cases, they have been punished for doing so, because prices have continued to rise in their absence. That’s created a second incentive for sitting on hands: fewer and fewer opportunities sit alongside an unwillingness to sell out of existing positions.
This immobility isn’t a bad thing in itself: a buy-and-hold mentality is to be welcomed, not least by end-investors who will be stung by fewer transaction costs.
But at some point, allocators will feel the need to justify their existence by making meaningful changes to their portfolios. Caution can only be maintained for so long.
Dan Jones is editor of Investment Adviser
