Which companies will profit most from positive COVID vaccine news? What firms should investors target to benefit from Europe’s Green New Deal? Which shares will benefit most from Joe Biden’s election as America’s new president? Many news commentators Fisher Investments UK follows have speculated about the answers to those questions and others like them in recent months. But investing in specific firms or industries solely because of widely watched events and widely held beliefs is a flawed approach, in our view.
When reviewing financial publications, we find speculation about major developments’ impact on certain firms and industries is nearly constant. Commentators frequently opine on how official monetary institutions’ decisions will impact various equity categories, for example. After the European Central Bank increased its asset-purchasing programme by €600 million last summer amidst the economic downturn, many market observers we follow suggested European shares could rise as a result.[i] Similarly, we have seen commentators speculate for years about Brexit’s share price impact. In our review of financial publications, we have seen many opine that Brexit would increase regulatory risk and trade barriers, hurting banks, automakers, pharmaceutical firms and more.[ii] Meanwhile, many commentators we follow contended large, multinational companies with strong overseas revenues would fare best as they thought the British pound would decline because of Brexit.[iii]
In Fisher Investments UK’s view, such headline-grabbing events impact equity markets to varying extents—but often well before most investors realise. We think markets are efficient, meaning they incorporate widely known information and beliefs into share prices near-instantaneously—particularly today, when the Internet and computers provide immediate, widespread information access. Everything from economic data to political and legislative developments to central bank policy decisions to corporate earnings are quickly factored into equity prices, in our view.
Beyond economic and political news, markets also consider discussions, opinions, interpretations and forecasts based on that information, which set expectations. We think this is crucial because markets are forward-looking—according to our research, equity markets generally care most about the economic and political factors affecting corporate profits over the next 3 to 30 months. Given that expectations for widely discussed future events are part of the universe of information markets digest minute-by-minute, we think markets have likely considered most potential outcomes well before they arrive. Whether markets rise or fall depends on how reality squares with the expectations reflected in equity prices, in our view.
For example, whilst headlines in publications we follow warned UK markets would suffer if the 23 June 2016 Brexit referendum passed, UK equities climbed throughout the following year. Three months after the vote, they were up 10.1%, using British pounds to avoid currency fluctuations’ impact.[iv] Six months after the referendum they had gained 13.4%, and a year after the vote they’d risen 21.6%.[v] These figures lagged world equities’ rise but represented solid returns against a gloomy backdrop.[vi]
Why would UK equity markets jump amidst widespread negativity, after the very thing investors broadly feared actually happened? In our view, it was partly because markets had long been considering the projected negative scenarios Brexit might cause. In early 2013, Prime Minister David Cameron promised a Brexit referendum if his party won the UK’s next general election.[vii] Cameron’s Conservative Party did secure victory in 2015, and in late June that year he told European Union leaders his referendum plans.[viii] From then until the vote, UK equities declined -3.6% whilst world equities rose 2.9%, again using British pounds to avoid currency fluctuations’ impact.[ix] In the two trading days after the vote, world equities rose 4.6% but UK shares tumbled another -5.6%, quickly pricing in more negative expectations. Any developments perceived as negative were then no surprise—sapping their power to hurt equity prices, in our view. We think reality easily exceeded low expectations, pushing UK equities higher.
Similarly, when the US and China officially enacted tariffs on each other on 6 July 2018, many commentators we follow warned about the potential negative impact on American equities. Many thought it would be an opening shot in a global trade war. But US shares gained 4.6% over the next three months, using USD to avoid the impact of currency fluctuations—beating world equities’ 2.2% rise in dollars.[x] Six months out, US shares were down -7.9% after the late-2018 global correction, but they still outpaced global equities’ -9.2% decline.[xi] A year after the tariffs’ implementation, US equities were outpacing global shares, 9.8% to 6.4%.[xii]
Why didn’t US shares suffer? We think it is partly because the tariffs were much-discussed long before their implementation—President Donald Trump pledged Chinese tariffs on the campaign trail in 2016.[xiii] Markets priced in any perceived negative impacts well ahead of their enactment, in our view. We think the tariffs also lacked the scale to create much economic damage, making expectations of a debilitating trade war overblown. Markets recognised that before many commentators did, helping equities rise amidst the negativity, in our view.
Since equity markets quickly digest recent events and generally look to the future, Fisher Investments UK thinks investors should be careful about making portfolio decisions based on recent events. Consider markets in 2020. At various points throughout the year, commentators we follow contended that rising equity markets were ignoring rising COVID cases and associated economic damage.[xiv] Far from ignoring them, we think markets had considered negative possibilities like COVID resurgences and adjusted accordingly well before they occurred, considering many in the medical community had projected a second COVID surge and associated lockdowns before the first lockdowns had eased. Since resurgences were expected, they lacked the power to hurt equity prices, in our view.
We think making portfolio decisions based on headline events risks acting on information already incorporated into prices—a mistake because markets look to the future, not the past. Instead, we think investors are better off considering how well off the economy and corporations will likely be 3 to 30 months out—and whether the investment community at large appreciates that.
Whilst big events grab headlines, Fisher Investments UK thinks investors are unlikely to gain an advantage buying or selling equities because of much-discussed, well-known news. To outperform broader equity markets, we think investors must see something that isn’t already factored into equity market prices.
Get exclusive stock market knowledge in your free Markets Commentary guide as the first of our ongoing insights.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] “European Central Bank Takes Its Pandemic Bond Buying to 1.35 Trillion Euros to Try to Prop Up Economy,” Silvia Amaro, CNBC, 4/6/2020.
[ii] “Biggest Losers: ‘Brexit’ Is Already Hitting These Companies,” Charles Riley and Heather Long, CNN, 24/6/2016.
[iii] “Brexit fallout – the business winners ... and losers,” Sean Farrell, The Guardian, 11/7/2016.
[iv] Source: FactSet, as of 15/12/2020. MSCI United Kingdom Index return with net dividends in British pounds, 23/6/2016 – 23/9/2016. Presented in pounds to avoid the impact of currency fluctuations. Fluctuations between the pound and <<currency name>> may result in higher or lower investment returns.
[v] Source: FactSet, as of 15/12/2020. MSCI United Kingdom Index return with net dividends in British pounds, 23/6/2016 – 23/12/2016 and 23/6/2016 – 23/6/2017. Presented in pounds to avoid the impact of currency fluctuations. Fluctuations between the pound and <<currency name>> may result in higher or lower investment returns.
[vi] FactSet, as of 15/12/2020. Statement based on MSCI World Index return with net dividends in British pounds, 23/6/2016 – 23/6/2017. Presented in Pounds to avoid the impact of currency fluctuations. Fluctuations between the pound and <<currency name>> may result in higher or lower investment returns.
[vii] “David Cameron promises in/out referendum on EU,” BBC News, 23/01/2013.
[viii] “European Council conclusions, 25-26 June 2015,” European Council, 26/6/2015.
[ix] Source: FactSet, as of 18/12/2020. MSCI UK Index and MSCI World Index return with net dividends in British pounds, 25/6/2015 – 23/6/2016. Presented in British pounds to avoid the impact of currency fluctuations. Fluctuations between the pound and <<currency name>> may result in higher or lower investment returns.
[x] FactSet, as of 15/12/2020. MSCI USA Index and MSCI World Index return with net dividends in US dollars, 6/7/2018 – 6/10/2018. Presented in US dollars to avoid the impact of currency fluctuations. Fluctuations between the dollar and <<currency name>> may result in higher or lower investment returns.
[xi] FactSet, as of 15/12/2020. MSCI USA Index and MSCI World Index return with net dividends in US dollars, 6/7/2018 – 6/1/2019. Presented in US dollars to avoid the impact of currency fluctuations. Fluctuations between the dollar and <<currency name>> may result in higher or lower investment returns.
[xii] FactSet, as of 15/12/2020. MSCI USA Index and MSCI World Index return with net dividends in USD, 6/7/2018 – 6/7/2019. Presented in US dollars to avoid the impact of currency fluctuations. Fluctuations between the dollar and <<currency name>> may result in higher or lower investment returns.
[xiii] “A 45% tariff on China will hurt US consumers, Capital Economics says,” Huileng Tan, CNBC.com, 29/9/2016.
[xiv] “Global Stocks Surge as Investors Ignore Record New COVID-19 Infections, and Pin Their Hopes on the Start of Earnings Season,” Saloni Sardana, Business Insider, 13/7/2020.