The world has been run by politicians, in some form or other, since the beginning of time but as the days wear on, a few harsh realities continue to come to light about the fragile political framework developed countries rely on.

Waves of negative politic movements have been crashing against the shores of the Western world, with Trump in the US and Salvini in Italy just two examples of elected politicians stoking the fires of racism and fear.

These worries have not gone unnoticed among institutional investors who have expressed concern throughout the year about the impact politics could have on investment performance. Questions related to the influence of politics on investor behaviour are familiar faces in our bespoke research and the apprehension on behalf of institutional investors echoes through all the results in different pieces of work.

In one global study, over 40% of institutional investors say politics and world events influence their investment performance. Now, academic research has found some evidence of stock market trends matching political events and although this is not set in stone, there is no doubt that politics affect investor sentiment.

Another study we conducted saw almost three quarters of institutional investors expecting geopolitical events to have a negative impact on investment performance. Furthermore, political uncertainty made over a third less likely to invest in infrastructure.

Although concerns about political events are clearly on institutional investors’ minds, there is little they can do to counteract them at this point in time and, if stock market performance is anything to go by, they may not even want to. When Trump was elected, many predicted a huge market sell-off. Actually, this only lasted a few hours, after which the markets rallied — something which took commentators by surprise.

The rise of social media and online interaction has, according to some, contributed to the increasing number of political ‘surprises’. The book Political Turbulence, written by professors from Oxford and University College London, studied digital traces left by small acts of political participation in a bid to understand why some movements and campaigns take on a life of their own while others quickly fizzle out. The book suggests that data science could help researchers understand, explain, predict and even influence the political world.

However, this is not yet a reality and institutional investors remain wary of political upheavals and the effect these could have on portfolios. In truth, evidence from the last two years should put their minds at rest. Both 2016 and 2017 were rife with political turmoil – the ongoing Brexit situation in the UK, elections in various European countries, Trump’s almost constant verbiage — and yet equity markets continued to generate strong returns. This suggests that although politics impacts investor sentiment, it hardly make a dent in the actual performance of properly managed investment portfolios.
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