By the time the Italian referendum rolled around in the beginning of December, markets didn’t even require days or hours before recalibrating and buying into the new reality post-Matteo Renzi.
“Really, the reaction to the Italian referendum is the most perplexing of them all,” Gutteridge continued. “There wasn’t that typical pattern of bad news selling on the day and investors buying into that weakness. With the “no vote”, rather than allowing investors to sell, markets were just buying into that outcome.”
In general, market resilience to these upsets might be further proof that “the six to seven-year bull market that people love to hate will be here to stay for a bit longer,” offers Potter.
New year, new rules?
One of the main unknowns for 2017 is whether markets will continue to be so sanguine when reflecting political disturbances.
In Gutteridge’s view, a victory for far-right National Front head Marine Le Pen in the French presidential election or a loss for German chancellor Angela Merkel would “have a much bigger meaning for the future stability of the European project than Brexit.”
Although he does not believe Le Pen will emerge victorious against former Prime Minister François Fillon, he thinks she has a higher chance of winning than people realise.
“Against Fillon’s Thatcherite revolution, Le Pen is campaigning on the anti-austerity ticket and has immigration and social policies that are quite compelling to parts of the electorate. That might prove difficult for Fillon to overcome. The French are known for wanting to protect workers’ rights, and liberalising and reforming the economy, as Fillon wants to do, means removing some of those.”
Similarly, if the liberal, pro-European Merkel is not re-elected, it is reasonable to assume the winning party will have a much more anti-European flavour that puts the market at risk.
Therefore, “investors should be going into 2017 prepared for surprise outcomes that are much more negative than the ones we have seen in 2016,” he cautioned.
Potter also cautions against treating 2017 like the years two years before it.
“We have to be very careful of how we think of 2017 versus 2015 and 2016,” he stated. “We are on the cusp of some seismic shifts in the market in terms of inflation, bond yields and economic growth.” If Trump delivers on his fiscal and economic growth objectives, “the world we have known for the last five years might be turned on its head,” said Potter.