Trump and Brexit offer investment opportunities

This is not a coincidence: the political upheaval is reflective of an emerging paradigm which separates humans less by country, culture or religion, but more by income, education and social mobility. In financial markets, as in life, it pays to be aware of tectonic shifts to evaluate their impact.

As recently as between 1993 and 2005, 98 per cent of households in 25 advanced economies saw real incomes rise. However – in the decade that followed – real incomes fell, or were flat, for two-thirds of households in those countries. This equates to 540 million people. Our calculations show the UK is no

exception. Median disposable income was over twice as high in 2015 as in 1977. But, over this same period, mean household income increased at a much faster pace as high-income households took an increasingly large share of the pie. Indeed, the top fifth of incomes grew 25 per cent faster than those in the

bottom fifth since 1977, with the distance between the top and bottom income quintiles far above that in the 1970s and 1980s.

In a recent survey we conducted in collaboration with YouGov, about half of the UK population felt their wealth was “about the same” or “less” than it was 10 years ago. Indeed, this was felt more acutely in the north of England with only 42 per cent saying they felt more wealthy than 10 years ago compared to 48 per cent in London. And thus, one begins to piece the puzzle of public anger which is so vividly transforming global politics.

There are innumerable reasons behind something as complex and structural as global income inequality. They include: ageing; slowing global growth; declining productivity; higher household debt for those with lower incomes; globalisation; automation; education; capital gains; and taxation.

Following the Trump victory and Brexit – combined best described as “Brump” - a shock populist outcome is no longer a shock. These are harbingers of long-term, structural forces reshaping the landscape in which geopolitical events will evolve. Against that uncertain backdrop, our advice to clients is threefold: be optimistic, be selective and be disciplined.

First, be optimistic. There are lots of causes for concern in the current macro environment. Whether it is the swing in politics or the fragile economics, the mood can at best be described as one of pessimism and scepticism. Often those are the ripe conditions to invest. It is when everything looks rosy that one should be cautious. That is when risk is often at its highest.

Second, be selective. Not too long ago, cash in a savings account yielded 5 per cent; today, equities may well struggle to achieve that. One of the key changes as a result of ageing demographics and skewed income distributions is likely to be perpetually lower equilibrium interest rates. Give that the conditions for a “golden age” of growth are unlikely to materialise again, we must be ready to accept a lower return than we have historically.

Still, opportunities are ever present. It is prudent to have some defensive assets such as government bonds and cash, as they offer the “dry powder” to invest

opportunistically. And, although equity market valuations are higher, they still offer some value.

Moreover, within equities, some sectors and regions still present the potential to harvest good long term returns.

Finally, be disciplined. We live in a world where events unfold very quickly and markets can move with staggering speed. A disciplined investment process that seeks to evaluate the long-term fundamentals rather than focus on short-term movements is key to navigating the uncertainty. It is critical to eschew the “noise” which inevitably surrounds period of great change. By focusing on indelible drivers of long term asset returns such as valuation, momentum and sentiment, the short-term movement and uncertainty can be prudently managed.