Monday, May 15, 2017

From an investor perspective, do votes matter?

We've had a lot of votes recently, and there are more to come in the UK and Germany. But as far as markets are concerned, do they matter?

Cast your mind back to mid 2016 and the UK referendum on membership of the EU. Markets were a bit jittery in the run-up, and fell sharply in the immediate aftermath of the shock "Brexit" result. However, although the pound dropped by about 10% in the immediate aftermath, the FTSE fell by 5% or so, but quickly rebounded. It is now 17% higher than it was on the day after the referendum, a big enough jump to more than offset the decline in the value of the pound.

Similarly, the run up to the US presidential elections was marked by dire predictions of a likely huge negative reaction in markets in the event of an unexpected Trump victory. We know the outcome of both. The market reaction was limited to the morning of the result itself, with the index actually gaining by close of business. It has subsequently gone on to register ever higher new highs: the most recent of which was earlier this month.

At least as far as both these two unexpected popular vote results are concerned, markets seemingly ignored both the result and the predictions of doom that accompanied them.

The question is: Why?

In the case of the UK, the departure from the EU brings huge uncertainties over trade, employment prospects, immigration and therefore company growth opportunities. You only have to visit a typical hotel or high street coffee shop in the UK to realise that foreign labour is a huge component of the service economy. Any reduction in this will result in either a constraint on growth, or higher wage costs (and therefore inflation), or both. Similarly, constraints on trade will mean that access to markets could be badly disrupted, and again, that's hardly good for company profits.

So why, then, has the UK market been so buoyant? It's partly because the economy - so far - has been much stronger than expected post the Brexit vote. And it's also partly because with interest rates so low, the alternatives to investing in the stock market look unappealing, to say the least. Perhaps there's a collective desire to focus on the short-term whilst leaving the longer term issues to the politicians to sort out. Good luck with that, given the shallowness of that particular talent pool, but there is certainly a logic to focusing on the here and now rather than the unknowable outcome of some complex negotiations in which both sides have much to lose from a negative outcome.

In the US, the picture is similar: an unexpected political result has not - so far - produced the economic shocks that many had feared from potential trade wars, immigration curbs etc. Trump has - so far - backed a more pragmatic and conventionally Republican approach, which is still business and market friendly. As a consequence, the same low interest rates in the US as in the UK encourage investors to take more risk than they would if bond yields were twice what they are today.

Having said that, valuations in the US are high, and so it seems that the room for further growth on purely "value for money" grounds seems more limited than elsewhere. It's for this reason - and not (so far) for any political concerns, that we've been trimming back on our US allocation in the last few months. By contrast, European markets and a number of those in Asia look cheaper, and those are where we've been increasing our allocations.

The end result is that unexpected political results have so far produced outcomes which are curiously like the status quo.

Markets like that, and for the time being at least, there seems little reason to expect a significant shift... at least until some future Twitter storm at 3am in the morning unleashes something truly consensus shattering. It's gonna be huge.

e-mail: steve.davies@javelinwealth.com
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Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.

Investing in start-ups? Take a look at this...

Back in March, we held an event for an innovative new fund that we have launched in conjunction with our friends at www.startup-o.com, a startup development platform.

As part of the launch event we invited our old friend, John Bittleston, along. Some years ago, John set up the excellent Terrific Mentors International, which provides mentoring services from wise people like himself.

Quite unexpectedly, John followed up our event by writing about it in his own blog (see http://www.terrificmentors.com/paradox/innovation-funding-come-age/). Over to John...

Daily Paradox readers are familiar with my definition of creativity. “Creativity is the ability to perceive relationships”. A sparkling example of this is the new joint venture between Javellin Wealth Management and Startup-O, a Singapore based platform that helps tech startups in Asia. 

The needs: (1) A source of funds for innovators by entrepreneurs (2) A source of innovative investments properly selected, monitored and developed for investors.

The solution: join the hands of both sets of experts across the divide and work together. As the collaborators say “Startups are not getting funded & Investors are missing opportunities”. They are right. The system has pitted ideas against investment instead of getting them working together. The time and effort – and adversarial relationships caused by such an arrangement – have generally worked against the interests of the startups. They haven’t worked much in any but the shortest-term interests of investors either. 

There are, of course, many more people than the two companies involved and this is where the arrangement looks especially appealing. Working with the two partners are IP Bridge of Japan, the Founder Institute of the Philippines, the Headstart Network, the INCO Facility, BEAM, Prof Parimal Merchant of the SP Jain School of Global Management, HubSpot, Singapore Infocomm Technology Federation, Tim Kobe, the designer behind the original Apple Store concept, WhatIf business modelling and SPRING Singapore with its ETPL A*STAR connection, as well as other service organisations to cater for the joint venture’s needs.

That’s quite an orchestra and good orchestras require Top Conductors and First-Class Leaders. With Steve Davies, the founder and CEO of Javelin and Anuj Jain, the co-founder and CEO of Startup-O respectively filling the roles the stage looks set for some sweet music.

Terrific Mentors International doesn’t give financial advice or promote financial institutions and the success of the new venture has yet to be proved. But the contributors to it are already successful and the concept seems to us to be just right for the burgeoning world of innovation. Leave challenging relationships to marketing the innovations. 

I particularly like the approach of Javelin and Startup-O that prompted them to create such an impressive list of collaborators. They rightly regard a new product or service as a child. 

“It takes a whole village to raise a child”, they say. I agree.

John Bittleston