Brexit: What Impact Does Politics Have on Markets?

This video first appeared on Morningstar.co.uk.

Dan Kemp: During periods of political turmoil, it's natural to think about the impact these events will have on markets in general but also on your portfolio. And so, people are maybe surprised by the lack of interest that investment markets appear to have shown in the Brexit news yesterday.

We think there's a couple of reasons for that. The first is that UK assets already appear in the main to be underpriced, particularly equity markets and the pound. And so, when so much bad news is priced in, they are not necessarily going to react to the next piece of bad news. On the other hand, gilts which are where people tend to go to hide when there's bad news, look to us to be overvalued. And so, again, bad news is not necessarily going to drive the price any higher.

The second thing to remember is that there's no causal link between politics and what happens in investment markets. The two are very separate. Although we are very tempted to draw a line from one to the other, that can be a real mistake.

So, how should investors react to these circumstances? Well, given that political circumstances are so difficult to predict, we'd recommend putting them to one side and focusing on valuation instead. And remember, investment is not about what happens in the next few days, weeks or even months, but over the next years and decades.