The reaction of global stock markets to Brexit and to Donald Trump’s victory has left many investors dumbfounded. Following Brexit, the FTSE 100 has gained as much as 10% in value and after Trump’s victory, it also moved higher. Both results were supposed to mean a high degree of uncertainty and challenges for the UK, European and US economies. However, it hasn’t turned out that way – yet.
Brexit
The full impact of Brexit is unlikely to be felt for at least two or three years. It may even be a decade before we can say whether it was a good or a bad thing for the UK economy. As such, judging the performance of the UK economy since the referendum in June is akin to counting chickens before they’ve hatched. Nobody knows exactly how things will pan out and this is likely to lead to considerable uncertainty once Article 50 is invoked.
This is due to take place in the first quarter of 2017, at which point Brexit may come into sharper focus for investors. Negotiations between the UK and the EU are unlikely to be a friendly, happy event and could cause the UK’s future to appear highly challenging at times.
After all, the UK and EU are essentially beginning divorce proceedings. Few divorces end amicably and this could weigh on investors’ minds throughout 2017. That’s especially the case since both sides have an interest in presenting a tough negotiating stance to their domestic audiences. As such, areas such as access to the single market and immigration demands made by the UK may be denied – at least publically – by the EU, as it plays hardball to dissuade other EU members from deciding to leave.
Trump
Similarly, Donald Trump hasn’t yet taken office. We’re in a lame duck period where nobody knows how he will seek to govern the US. He’s likely to make multiple changes to policies including taxation, spending, foreign policy and immigration. After all, he campaigned on a programme of change and it seems extremely unlikely that he’ll accept the status quo.
Trump’s policies aren’t only unknown in terms of their detail, they’re unknown with regard to whether they’ll work. This could cause investors to become increasingly uneasy once he takes office in January and begins to implement potentially higher spending and lower taxation policies. As a result, investors may become increasingly risk-off in 2017 and this could cause share prices in the US and across the globe to fall.
Looking ahead
The uncertainty surrounding Brexit and a Trump presidency is likely to rise significantly in 2017. This could leave long-term investors with a superb opportunity to buy high quality stocks at a discount to their current valuations. And with Brexit and Trump as president being arguably the two most significant political changes in decades, 2017 could prove to be the best buying opportunity for a generation.
