Why You Shouldn’t Underestimate The Impact Global Politics Can Have on Your Investments

Why You Shouldn’t Underestimate The Impact Global Politics Can Have on Your Investments
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This article is sponsored by eToro.

When it comes to investments, being aware of how certain world events can affect the market is important. We’ve seen how drastic the market has shifted due to the COVID-19 pandemic, but another major event was the recent US presidential election, which has resulted in a shift as the interests of one power have been replaced another.

To understand just how much influence the US market and global politics can have on the Australian market, we spoke with eToro market analyst Josh Gilbert to get some helpful investment advice.

How does the US market affect others?

The US markets are the largest in the world, so even the slightest change can send out waves that can affect international markets – Australia included.

As explained to us by Gilbert, “The [New York Stock Exchange] makes up 27% of the total value of global equities. This means that it is strongly tied to other big markets such as the UK as well as Asian markets.”

“The chart below shows the clear correlation between the ASX200 (green) and the S&P500 (black),” Gilbert continued, “The Federal Reserve is a big part of the correlation between the two markets. Events such as Monetary Policy and Interest Rate discussions all tie back too the ASX and Australia’s Reserve Bank who hold the key to money just like the Fed.”

Will the politics of COVID-19 affect the market?

Over the past year we’ve seen how the global pandemic of COVID-19 has disrupted economics on a national and global scale, and it looks like those changes will continue into 2021. How will these disruptions further affect the US market, and what influence will this have on both the global and Australian market?

“We are moving into the new year with still a level of uncertainty around COVID-19,” Gilbert said. “Investors will need to assess the vaccine supply issues that are currently facing Pfizer on the distribution of the vaccine globally.”

Gilbert also pointed to the recent US stimulus package as an event that can result in market movements. As the US economy potentially improves from this package, it could could translate to stock prices rising and a healthier market.

“With the new amount of COVID-19 cases in the US, I can’t imagine it will be long before the US government look to push through a stimulus package.”

How do global politics affect the market?

When it comes to investing, politics can play a major role in the market. The rise of certain political issues and uncertainty of pre-existing ones can influence the value of relevant stocks.

One major way that politics can impact the market is the change of a country’s leadership. As new leaders take positions of power and introduce new policies while dismantling older ones, the focus of these reforms will affect the related markets and industries.

“If we look at [the factors] which move stocks the most from a political perspective, it would be elections and the regulation and policy changes that come with a new leader”, Gilbert explains.

“With Joe Biden being elected as the New US President, we have seen a huge demand for renewable energy stocks as Biden has set a clear plan to move the US away from fossil fuels and towards clean energy throughout his tenure,” Gilbert continues. “Healthcare is also a sector that has been affected by the US election, as Joe Biden is expected to reform the healthcare system in the US.”

“Politics will also affect overall sentiment for the investing, if there is political uncertainty, this will often cause volatility in the markets and will show bearish sentiment with investors.”

It’s understandable if you’re hesitant to make any future investments due to this unpredictability. This political uncertainty leading to an escalating volatility can be both a blessing and a curse. While it can increase the chance of making more money in certain markets, it will also increase the risk of the investment.

However, if you’re willing to put in the research time, there are potential investment gains to be had.

“We’ve seen some huge rallies from stocks this year as most have recovered well from their March lows, but if you missed these gains, don’t let that be the reason you pick a stock,” Gilbert said. “Make sure you do the research behind the equities that you are interested in and don’t let FOMO choose the stocks for you.”

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