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No clear link between politics and investing, says Morningstar

Glenn Freeman  |  24 Aug 2018Text size  Decrease  Increase  |  
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politics Australia prime minister scott morrison

With Scott Morrison set to become Australia's next Prime Minister - our sixth inside eight years, it's worth reflecting on how political events affect investor behaviour.

The Aussie dollar moved sharply higher to 72.85 US cents, when the former treasurer's victory was confirmed at about 1pm today.

It had been trading between 72.39 and 72.506 US cent ahead of the Liberal party room vote.

Investors have sold down local currency over the past two days,  as uncertainty over Australia's political leadership cast doubt on future policy direction.

Ahead of the vote, economists had forecast a win for Mr Morrison would be a positive for the local currency.

The political uncertainty hit the Australian dollar, which on Wednesday slipped 0.44 per cent for its second straight day of decline. 

Morningstar experts have urged investors to ignore the noise, and focus on fundamentals, pressing the dangers of making rash investment decisions based on short-term market sentiment. 

According to Brad Bugg, head of multi-asset income, Morningstar Investment Management Australia, it's natural to think about the impact political events will have on markets, both in general but also on your portfolio specifically. 

However, he says, over the medium- to longer-term, you will be surprised at the lack of interest investment markets turn out to have in such events. 

"There's no causal link between politics and what happens in investment markets. The two are very separate. Although we are very tempted to draw a line from one to the other, that can be a real mistake,” Bugg said today.

"Given that political circumstances are so difficult to predict, we'd recommend putting them to one side and focusing on valuation instead.”

He added that it was important to remember the considerable difference between "trading" and "investing". 

"Investment is not about what happens in the next few days, weeks or even months, but over the coming years and even decades," Bugg says. 

Doing something in response to external events outside your control is a natural human reaction. 

“But if the change is speculative, or worse still, in reaction to disappointing news, it should be cautioned and recognised as part of the journey. A classic symptom of timing the market," he says. 

Dan Kemp, who heads Morningstar Investment Management EMEA, recently quoted investing doyen Seth Klarman, in warning investors to keep calm amid ongoing Brexit uncertainty in the UK. 

"While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasises the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” 

Morningstar Australia's Brad Bugg says he believes that “staying the course” is the right approach – patiently allocating to assets that will help you achieve your goal. 

"So, if you catch yourself getting down about the state of the equity market or trying to predict what’s next, keep in mind these concepts and always remember why you are investing in the first place."

 

Glenn Freeman is senior editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication. 

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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