politics Australia prime minister scott morrison

With Scott Morrison set to become Australia's next Prime Minister - our sixth inside eight years, it's worth reflecting on how political events affect investor behaviour.

The Aussie dollar moved sharply higher to 72.85 US cents, when the former treasurer's victory was confirmed at about 1pm today.

It had been trading between 72.39 and 72.506 US cent ahead of the Liberal party room vote.

Investors have sold down local currency over the past two days,  as uncertainty over Australia's political leadership cast doubt on future policy direction.

Ahead of the vote, economists had forecast a win for Mr Morrison would be a positive for the local currency.

The political uncertainty hit the Australian dollar, which on Wednesday slipped 0.44 per cent for its second straight day of decline. 

Morningstar experts have urged investors to ignore the noise, and focus on fundamentals, pressing the dangers of making rash investment decisions based on short-term market sentiment. 

According to Brad Bugg, head of multi-asset income, Morningstar Investment Management Australia, it's natural to think about the impact political events will have on markets, both in general but also on your portfolio specifically. 

However, he says, over the medium- to longer-term, you will be surprised at the lack of interest investment markets turn out to have in such events. 

"There's no causal link between politics and what happens in investment markets. The two are very separate. Although we are very tempted to draw a line from one to the other, that can be a real mistake,” Bugg said today.

"Given that political circumstances are so difficult to predict, we'd recommend putting them to one side and focusing on valuation instead.”

He added that it was important to remember the considerable difference between "trading" and "investing". 

"Investment is not about what happens in the next few days, weeks or even months, but over the coming years and even decades," Bugg says. 

Doing something in response to external events outside your control is a natural human reaction. 

“But if the change is speculative, or worse still, in reaction to disappointing news, it should be cautioned and recognised as part of the journey. A classic symptom of timing the market," he says. 

Dan Kemp, who heads Morningstar Investment Management EMEA, recently quoted investing doyen Seth Klarman, in warning investors to keep calm amid ongoing Brexit uncertainty in the UK. 

"While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasises the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” 

Morningstar Australia's Brad Bugg says he believes that “staying the course” is the right approach – patiently allocating to assets that will help you achieve your goal. 

"So, if you catch yourself getting down about the state of the equity market or trying to predict what’s next, keep in mind these concepts and always remember why you are investing in the first place."

 

Glenn Freeman is senior editor, Morningstar Australia

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