Managing media madness
01 June, 2016
It's quite nice being in New Zealand where the most significant political debate of recent times centred on an unsurprising and unspectacular Budget. Financial markets barely moved before or after the Budget, and I suspect that in terms of business and consumer confidence, Bill English's announcements made little difference to any of us.
You'd be feeling a lot less sanguine if you were living in Britain ahead of the Brexit vote on June 23, or in the United States ahead of the November presidential election. The British and American media machines are in overdrive as proponents on either side of the political divide stake their often extreme claims to win support. The media noise is so deafening that investors everywhere are left struggling to decipher what a Brexit (Britain's exit from the European Union) or a Trump victory might mean not only for Britain and the US, but for the world at large.
Financial markets don't need an excuse to tread cautiously in coming markets — low economic growth, low interest rates and the perennial discussion about the Fed's next interest rate hike have been sufficient reason for markets to tread water year to date. Add in uncertainty around Brexit and a possible Trump win, and it's hard to imagine a strong market rally happening any time soon.
Brexit hasn't been as widely covered here as the US presidential race, probably because there are fewer personality based sound-bites to be had around Britain's potential exit from the EU. Although Boris Johnson, the former London mayor and leader of the independent Britain campaign, is colourful and eloquent he is opposed in the Stay or Leave debate by a variety of celebrities, economists, politicians and Treasury officials.
While Brexit may not seem as big a deal as a new American president, it would arguably have a far more significant impact on the global economy, with opponents predicting a loss of 820,000 jobs, a sharp rise in inflation and a hit to British GDP of between 3.8% and 7.5% should the nation decide to go it alone. That's not to mention the impact elsewhere — financial instability and a loss of confidence throughout Europe and beyond and a reduction in international trade as the UK is a top three export destination for Germany, Ireland, Spain, Cyprus, the Netherlands and Poland.
But like all news du jour, it is important that we maintain perspective and understand that markets are very good at discounting widely known information. A new market cycle will not immediately kick in following the Brexit vote or on the day after the American election. If anything, markets are likely to be volatile and cautious ahead of these significant votes, but as we get closer to them, markets may well be calm as there tend to be fewer unknowns as voting day approaches.
In the case of the presidential election, the time for market reaction will be when the new President takes action and passes legislation. That won't happen quickly or easily because Presidents don't have the power to act unilaterally, whatever they've promised during their election campaign. For virtually every action, the new President will need the support of Congress. And Congressman will always have in mind their primary goal — to get re-elected.
As for Brexit, whether the vote is to Stay or Leave, discussions with Brussels will need to happen. If Britons vote to stay in the EU, David Cameron will no doubt seek to renegotiate the terms of the relationship and get a 'win' in some of the key areas that prompted the Leave campaign. If Britain chooses to leave, there will be two years of exit discussions before anything really happens.
There's plenty of time for markets to understand the ramifications of the story of the day.