SHOULD INVESTORS BE PAYING MORE ATTENTION TO MAJOR POLITICAL EVENTS?

Jenna Owen is a business, finance and technology writer. 

 

The very nature of investing, particularly in the stock market, is speculative. Despite the best insight, expertise and knowledge of the markets, the outcome is never a given and its entire infrastructure is based on who is willing to stick or twist at any given moment in time. Therefore, equipping yourself with as much information as possible is essential to improving the likelihood of your investment decisions going in your favour. Recent research by IG Group has suggested that exploring the links between major political events in history and forex movements could provide valuable insight into how currencies are likely to fare in the face of future events.

 

Do historical events hold the secret to future predictions?

Major political events can be as influential on the stock market as natural disasters and wars, so are well worth exploring when it comes to analysing previous trends or patterns. Significant data now exists over a period of decades, covering all of the major currencies and political stories. Recent events include President Trump’s healthcare bill collapse, Theresa May’s withdrawal deal and Boris Johnson speaking out in favour of the UK leaving the EU prior to becoming Prime Minister. Further back in time, the 1995 election of French President Jacques Chirac resulted in a turbulent time for the franc, and the Deutsche mark experienced a significant drop during the fall of the Berlin Wall in 1989. What is perhaps most interesting, is assessing the resilience of particular currencies after such events, as this can often be a much stronger indicator of their long term viability. Even the strongest of currencies are likely to experience peaks and troughs over time as the market is highly sensitive and often issues knee jerk reactions, even if these are rectified shortly afterwards. When exploring the progression of the pound over the years, it has shown remarkable resilience, even in the face of significant change or uncertainty. Despite the ongoing Brexit negotiations, the pound has continued to be the best performing G10 currency over the past six months. Such robust behaviour could well indicate to investors that the pound is likely to continue faring well even in the face of future events, making them less likely to panic at short term dips in price.

 

Jenna Owen

Brexit panic

Standing firm in the face of uncertainty is not as easy as it sounds, particularly when portfolios are worth millions or even billions of pounds. Investors and fund managers are also influenced by the risk levels associated with their portfolios, so in many cases, the decisions are driven by an immediate necessity to react rather than longer term viability assessments. Certainly in the case of Brexit, this has led to a scenario known as a ‘spectators haven’, where those who are able to be more risky can capitalise on the spikes and dips, which are a response to the ongoing negotiations.

 

Insider Information

Insider information is a pertinent discussion point when considering the influence of politics on the stock market. Although it is illegal and the industry takes a hard line on such activity, it is often difficult to prove that investors were acting with privileged information. That said, the timings of significant transactions made just prior to major political announcements are often subject to scrutiny and speculation from the wider market. There have been a number of occasions since President Trump was elected where significant trades have taken place prior to a major political announcement that have greatly benefitted the traders or those they are representing. Despite suspicions being raised, no foul play was reported by the Chicago Mercantile Exchange, the Securities and Exchange Commission or the Commodity Futures Trading Commission, although this has not stopped others suggesting that something ‘just didn’t feel right’ about the nature of the transactions, especially considering the profits made were in the billions.

 

What is clear is that historical data can help to shed light on the likely patterns of behaviour that will follow after major political announcements or events. The outcomes remain unpredictable and there could be subsequent events which are triggered by the announcement that lead to a snowball effect. These might well be completely unforeseen and leave all traders acting purely on what they know at that particular moment in time. That said, understanding how currencies fare over time, their resiliency and the likelihood of recovery within a relatively short space of time can help investors to decide how rapidly they need to respond and whether riding the wave could be a smarter move than jumping ship.

 

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