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This week we have presented content from our Monthly Investment Newsletter. Click HERE to read the entirety of our Spring Quarter update.
It has been another interesting quarter.
Diversified portfolios continued to perform very well despite the media’s best efforts to have us all running for the hills.
It's true - there continues to be some large uncertainties in the world - we are reminded of them every day in print and on television. But that’s not always relevant when it comes to investment performance.
Even though we don’t yet know how or when Brexit will eventually occur, or how the China/USA trade war will play out, market participants around the globe accept that these issues are real and have priced in the elevated risks they represent.
When we talk about something being ‘priced in’, we mean the market’s collective expectations or predictions about the future are already built into securities prices today.
Why is this relevant? Well, let’s consider an example based on the mid 2016 vote in the UK, which resulted in their surprise decision to leave the EU.
Immediately after the vote, UK shares and the value of the British pound both took a hit. In the short term, market prices reacted quite sharply to this previously unanticipated news. Markets reacted because they had only priced in a low probability of the ‘Leave’ vote winning.
Fast forward to today, and the idea that the UK is leaving the EU is not new information. We’ve known about it for more than three years, but even today no one can be entirely sure of how Brexit will happen and what the precise consequences will be.
The ongoing speculation today is mainly about whether it will be a hard Brexit (no deal with the EU) or a soft Brexit (a negotiated deal). Perhaps there is even still a very remote chance that the UK might have a new election, a new referendum, and not ever leave. But after three years of uncertainty on this issue, the markets are highly sceptical that Boris Johnson (the new UK Prime Minister) can pull a rabbit out of a hat and negotiate a leave deal acceptable to both the EU and the UK. This scepticism is factored into the market prices of UK securities in particular, and global securities more broadly.
But, for the purposes of this thought exercise, let’s imagine what would happen if there was a rabbit residing in Boris Johnson’s hat. If the UK could somehow reach a favourable leave agreement with the EU, then this would probably be regarded as a much better outcome than market participants currently expect. In that scenario, the UK would leave the EU and UK securities prices, and share markets in general, might actually go up.
And that’s the point we need to continue to remind ourselves. Bad news or uncertainty is quickly factored into market prices as soon as we know about it. Even our collective expectations about the future are priced in.
To read the rest of our Q3 Investment Summary click HERE.