2016 was a year characterised by headline-grabbing political events and 2017 promises more of the same, with numerous countries holding national elections, including countries across Europe such as France, Germany and the Netherlands.
Financial markets seem increasingly influenced by politics. And not just by the result of an election or referendum - the months leading up to the actual event provide plenty of speculation which can cause big movements in stockmarkets.
So surely active investors will be chomping at the bit at the prospect of big market moves and therefore big opportunities to capture returns?
For some active managers maybe, but at Pyrford, being ‘active’ doesn’t mean making lots of trades as markets move up and down. We prefer to be active in our constant assessment of whether our long-term investment themes still hold true in the ever-changing political and economic backdrop.
One area that highlights this is the European banking sector. This sector is heavily influenced by politics as any change in administration could mean a change in the regulatory environment, or perhaps the agreement of a new bailout package.
The constant see-sawing in the race to the polls means huge swings in the price of bank shares.
However, as 2016 sorely demonstrated, trying to predict the outcome of public votes is a very difficult task and we prefer not to take such risks.
Furthermore, whichever way the voting goes in the various ballots, the fundamentals of the European banking sector will not suddenly change, and although some progress has been made since the global financial crisis of 2008 towards a more robust banking system across the region, there remains much to worry about.
A huge proportion of non-performing loans and a very low interest rate environment, amongst other hurdles, present a major challenge to banking profits, something which will not change overnight post an election result.
There are some signs that pressures are alleviating and we have carefully investigated some of the healthier banks in, for example, Scandinavia, the Netherlands and the UK, but all is not yet well.
As such, we are not banking on the success of any political party and we have zero exposure to European and UK banks, and have held this position for some time.
We prefer to put our money where we believe there is significant downside protection for our investors’ capital.
Our first and foremost aim is not to lose our clients’ money and if that means taking a cautious stance, as we feel it currently does, then we are more than happy to actively hold this approach.
Pyrford International is an independent investment boutique operating as part of BMO Global Asset Management.
For professional investors only. © 2017 BMO Global Asset Management. All rights reserved. Issued and approved by BMO Global Asset Management, a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.
