Investors are familiar with a broad set of macroeconomic variables that often drive asset prices. Many are familiar with corporate balance sheets, price-earning ratios, free cash flow, Q-ratio, and the like.
However, political factors are more difficult for investors to integrate into their analysis. Therein lies the main challenge in the year ahead. There will be many opportunities for political factors to overwhelm economic considerations. This past year gave a an inkling of what is possible with the UK decision to leave the EU and the election of Donald Trump as the next US president, both of which surprised many.
Perhaps what is even more surprising is what happened next. The sharp depreciation of sterling was anticipated, though the speed of the adjustment may have caught many off-guard. The UK economy fared better than some economists had anticipated, though the aggressive central bank response may have helped. In addition to the stimulus provided by an 11% decline in the 100-day moving average of sterling's broad trade-weighted index, the Bank of England cut the base rate, provided cheap funding for banks, and resumed its sovereign bond-buying program, including corporate bonds for the first time. The economy maintained its forward momentum.
(This essay is part of BBH's quarterly outlook. For the entire publication, click here).
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