As an exit poll in the UK shows that Conservative support has crumbled in the last few days this begs the question, is there money to made going against stock markets? We have never been in a more volatile political period than the current decade with previously dominant governments collapsing all around the world. Indeed, who would have guessed that Donald Trump would be president of the USA in 2017?
Market expectations
If we take the UK as an example, markets were fully expecting a Conservative win with an enlarged majority. This was taken for granted by the bookies, investors and analysts who were all pricing in a larger than ever Conservative majority in the House of Commons. There is therefore an argument that because markets were taking this “for granted” there was more potential downside than there was upside. Make sense?
Short-term reaction
When an exit poll was announced at 10 PM UK time the pound was marked down sharply as a hung parliament was predicted. Stock markets may well initially react with a positive spin because the reduction in the value of sterling helps those companies with overseas exposure when converting back to the UK currency. The medium term situation is a little more difficult to predict because the Conservative party may well have limited scope for some of its more ambitious economic policies.
Investors move to the sidelines
As UK investors come to terms with a possible hung parliament, if this is the outcome, some of them will move to the sidelines while they consider their next move. This could cause a short to medium term fall in the UK stock market which had factored in a certain Conservative majority. Even if the Conservative party does increase its majority in the House of Commons how much more upside might there be? Surely from the position just prior to the election, when all signs were that the Conservatives would increase their majority, the only way was down?
Profit-taking
When you also take into account that many people will have significant paper profits having invested in the run-up to the general election, surely some of them might be tempted to take a profit? When one prominent figure takes a profit this can often lead to others following suit and very quickly a trickle becomes a deluge. In many ways markets, and investors, have limited their upside in the event of a hung parliament with the short to medium term focus on a possible correction.
Going against the market
It is always very dangerous to go against the market but there is no doubt, like an elastic band, sometimes markets do overreact on the upside and on the downside – then spring back to “fair value”. It is very easy to get carried away on rumours and counter rumours which can have a significant impact on share prices. One trick which many long-term investors have made full use of is to buy companies which have long-term attractions even though there may be short-term difficulties, resulting in a falling share price.
It is the ability to look further ahead than just the next few weeks and months which can make a massive difference to the performance of your portfolio. You may have a few difficult moments as markets come to terms with the changing fortunes of a company, in the short term and the long term, but if the long-term situation remains intact and the short term issues can be resolved, there is good money to be made by going against the market. However, you must be certain of your facts and have total belief in your decision!