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Does politics matter?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Does politics matter? The fastest growing economy in the G7 in 2016 was the United Kingdom. Despite the unexpected EU referendum result, the ensuing change of government, and the uncertainty about future policy direction, the economy continued to grow.
  • Politicians are not as important as they think. Economists are important, of course, but politicians' policies generally impact the medium- to longer- term trend of an economy. Cyclically, people tend to care about whether they have a job, and whether they can buy what they want to buy (paying cash or using credit – the latter is why central bankers matter to the economic cycle).
  • Financial markets do react to politics, because financial assets price in longer- term assumptions. It is worth remembering that domestic investors generally have a better understanding of local politics than do international investors. A market that is dominated by domestic investors is therefore less likely to overreact to political risk than is a market dominated by foreign investors. This is important in 2017 – while there are more political events in Europe than in the United States, there may be more political risk in US markets. International investors tend to be more important to US financial asset prices.