How does politics influence markets?


In recent years, the world has witnessed an array of surprise election outcomes, sometimes accompanied by market reactions that are often behavioural in nature. These ‘episodes’ can create attractive opportunities as market prices and fundamental value diverge.

Politics can have significant impacts on markets as the way societies are run heavily influences asset returns over the long term. Over the short term, political effects on markets can be less easy to interpret.

Reactions to political events can be inconsistent, with large price moves triggered in 2016, while European elections in 2017 generated little reaction beyond local markets. Concerns over a possible trade war in 2018, acted as a trigger for March’s stockmarket downturn.

Those inconsistent responses to political events mean that investment opportunities can be created as investors’ emotions drive asset prices rather than fundamental valuations.

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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