In Back to the Future II, Marty McFly’s nemesis grows rich by using a sports almanac (from the future) to successfully bet on major events. That character, Biff Tannen, was based in part on Donald Trump. But any investors who had foreknowledge of Mr Trump’s own surprise win last year are unlikely to have fared as well as his fictional twin.
The rise in equities following the US presidential election was second only to the post-Brexit share rally when it came to unanticipated outcomes in 2016.
The logic behind either move seems simple now, but in both cases voting confounded the consensus and then the market reaction did the same.
So it’s no surprise to hear many fund managers acknowledge that misjudging political risk helped their performance last year. Even if you had advance knowledge of 2016’s shocks, you would have still lost money trying to position for them.
This isn’t a call to disregard political risk. Emerging market investors do not do so – and, as dysfunction takes hold in certain Western centres of power, there is an argument that everyone is an emerging market investor now.
But working out how to deal with that risk is a knotty problem. This is particularly the case when considering how these issues interact with the era of ultra-low interest rates.
Investors have already grown familiar with the concept that “good news is bad news” when it comes to economic growth, given that better data has been seen as likely to prompt a tightening of monetary policy.
This period may be over in the US, but it is only just beginning in Europe. The eurozone also has to deal with its own political risks this year. Marine le Pen faces a much tougher route to success than either Trump or Vote Leave, but her electoral victory remains a possibility. Are investors sanguine because they believe it won’t happen, or because they think the impact of the result will again be less significant than some fear?
On top of this dynamic is the uncertainty about US government policy. Not just whether or not it will have a protectionist slant, but what the consequences will be for investors should the Trump administration take such a path. In that scenario, could the president succeed in talking down the dollar in the face of policies which have the opposite effect?
Some of these problems may be short term in nature, which means the tried and tested decision to steer through the noise will probably bear fruit. But positioning for the long-term impact of some of these changes may prove easier said than done.
Dan Jones is editor of Investment Adviser