Dr. Asoka Woehrmann – Co-Chief Investment Officer
the third quarter, October got off to a bumpy start though. The cause: political wrangling in the US and the eurozone. Should investors be worried?The political scrap in the US brings back memories of 1995, when the Newt Gingrich-led Republicans blocked the federal budget in a bid to compel President Clinton to cut spending on health and education. Now, another Republican – John Boehner, Speaker of the House of Representatives – is calling for a repeal of Obamacare, which aims to provide health cover for at least 45 million uninsured US citizens. The Republicans have gone through with their threat to prevent an increase in the federal budget, leading to a partial government shutdown that has put 800,000 public servants on enforced leave.
What effect this will have on US growth remains to be seen. However, downward trends in interest rates, equities and the US dollar suggest that investors are expecting a slowdown. In response, the US Federal Reserve has postponed the tapering of its monthly asset purchases, maintaining expansive monetary policy while it waits to see if the economic upturn will be sustainable.
Stock markets in Europe have also been driven by politics of late. In Italy, former Prime Minister Silvio Berlusconi‘s attempt to oust the current government failed, though not before sparking a political crisis that roiled markets. Enrico
Letta‘s administration remains in office, but the scare shows that peripheral eurozone countries still need to achieve greater political and economic stability.
Political events are making the most noise in financial markets at present and causing roller-coaster swings. But there‘s a German saying that investors should bear in mind: “Political stock markets have short legs.“ Ultimately, lasting trends are determined by the economic environment, not by congressional or parliamentary dust-ups. Thus, faster growth, very modest inflation and low interest rates should lead to further gains in equity, commodity and real estate markets over the medium term.
Source:DWS – CIO (October)
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